* Qatar has overcome problems related to the blockade
* Fiscal deficit has shrunk, surplus expected in 2019
* Banks compensated for deposits outflow
* Local banks’ profits enough to cover future challenges
* Imports volume returns to pre-blockade levels


Fitch, an international credit rating agency, has revised upward Qatar’s outlook to “stable” from “negative” and affirmed its long term foreign currency issuer default rating (IDR) at ‘AA-’.

Finding that domestically, support for His Highness the Amir (Sheikh Tamim bin Hamad al-Thani) and the government appears to have strengthened, Fitch said the attempts by the quartet to force companies or countries to pick sides in the dispute have not gained much traction.
Qatar has successfully managed the fallout from last year’s rupture of trade, financial and diplomatic relations with the quartet consisting of the UAE, Saudi Arabia, Bahrain and Egypt, it said in a report.
Public sector liquidity injections have stabilised the banking sector and stemmed the outflow of non-resident funding, it said, adding the fiscal deficit has narrowed sharply and “we expect it to turn into a surplus in 2019.”
The economy has reconfigured its supply chains and continues to grow at a robust pace. There has been no escalation of measures against Qatar, according to Fitch.
Around $10bn in non-resident funding has flowed back into the banking system since November 2017, after falling by $30bn in June-October 2017, mainly on withdrawals of deposits by Saudi Arabia and UAE-based clients.
A return of non-resident funding has allowed the public sector to pare back its liquidity assistance to the banking sector by $10bn in January-April 2018, from cumulative injections of $40bn in June-December, consisting mainly of placements by the Qatar Central Bank (QCB), the Ministry of Finance, and the Qatar Investment Authority (QIA), it said.
“We estimate that sovereign net foreign assets (reserves plus other government assets less external debt) were $236bn (141% of GDP) in 2017, down from $250bn in 2016 but still far above most ‘AA’ and ‘A’ peers,” Fitch said, adding the decline is driven by a reduction in QCB reserves to $15bn in 2017, down from $32bn in 2016.
Estimating other government external assets at around $270bn in 2017, little changed from 2016 and mainly in the QIA, it said strong asset market returns are estimated to have offset much of the impact on QIA external assets from repatriating liquidity into Qatar’s domestic banks.
Fitch said the government fiscal deficit narrowed to 2.8% of GDP in 2017 from 6.3% of GDP in 2016, including the estimated investment income on the QIA, as falling spending offset weakness in hydrocarbon revenue (which reflects price movements with a lag).
“We expect the government budget to be balanced in 2018 and to post a surplus of 2.9% of GDP in 2019 as higher oil prices seep through to public finances, excise tax and value added tax are implemented in 2019 and growth in current spending is restrained,” it said, expecting capital spending to bounce back in 2018 and plateau at QR100bn per year in 2018 and 2019.
It also said a $10 per barrel increase in oil prices could lead to an improvement in the fiscal balance of around 4% of GDP (gross domestic product).
The sovereign infrastructure spending is likely to moderate after 2020, even if the government adds some new projects to the pipeline in order to sustain non-oil economic activity, it said.
“This should help offset the fiscal effect of additional capital spending by Qatar Petroleum in 2020-2022 related to the planned 20% expansion of liquefied natural gas exports from the North Field,” it said.
The government faces less pressure to increase public sector employment and maintain social benefits than many of its regional peers, given the small number and high level of wealth of Qatari citizens.
Highlighting that real GDP expanded by 1.6% in 2017, it said, “we expect a pick-up to 2.3% in 2018.” The non-hydrocarbon GDP grew by 4.2%, down from 5.2% in 2016.
Imports have recovered to their pre-June 2017 levels, reflecting the establishment of new shipping routes through Oman and India to Qatar’s recently-opened Hamad port.
“The government’s narrow tax base means revenues depend far more on hydrocarbons than on the rest of the economy, but steady economic performance will allow the government to press on with fiscal reforms and reduce the need to support the private sector,” Fitch said.
The country’s large banking sector relies heavily on non-resident funding and has concentrated exposures to a weak domestic realty sector, which had been facing falling prices and overcapacity even before the economic boycott.
The QCB real estate price index was down 9.3% year-on-year as of March 2018, having picked up slightly since January. The consumer price index sub-index for housing expenditure was down 4.5% in April, reflecting falling rents.
“Nevertheless, for now, banking sector profitability is sufficient to absorb foreseeable pressure on funding costs and asset quality, and capitalisation levels remain adequate,” it said.
Qatar’s government will have little need to seek new international financing after a $12bn global bond issue in April 2018, which will cover its net financing requirement for 2018-2019.
“Despite the issuance, we expect the debt ratio to be broadly stable in 2018, as the government will reduce overdrafts to regular levels,” Fitch said.