Qatar's fiscal deficit is expected to gradually narrow over the coming quarters on substantial gains in hydrocarbon revenues, according to BMI, a Fitch company.
However, the government will continue to cover its budget shortfalls through debt issuance, but faces little risk of any credit event, given a still-low debt-to-GDP (gross domestic product) ratio and vast financial buffers, BMI said in a report.
"Overall, we forecast the deficit to come in at 3.1% of GDP in 2018 and 2.2% in 2019, from an estimated 5.5% in 2017," it said, adding this compares favourably to the government's 2018 budget, which — based on a highly conservative hydrocarbon price assumption of $45 per barrel — envisions a shortfall of about 4%.
As the government continues to borrow to cover its deficits, debt is slated to rise from an estimated 55.8% of GDP in 2017 to 57.1% in 2018, peaking at 57.4% in 2019 before slowly reducing, it said.
"The debt-to-GDP ratio is still small on a global comparison, which, coupled with Qatar's vast financial buffers, means that Doha is at little risk of experiencing a credit event," BMI said.
Forecasting government spending to increase amid efforts to develop infrastructure and support non-oil growth — albeit at a more moderate pace than revenue, it said "notably we expect continued spending on 2022 FIFA World Cup-related infrastructure projects (materials for which may have become more costly as a result of the Gulf Cooperation Council (GCC) crisis-related blockade) and the development of transport, healthcare, education and food production facilities."
The government will continue to fund its narrowing fiscal deficits through external debt issuance, avoiding drawing down on its sovereign wealth fund (as the rate of return on its assets remains greater than borrowing costs), and limiting domestic liquidity pressures, BMI said, quoting reports that the country is looking to issue Eurobond of around $9bn in the first quarter of 2018.
"We nevertheless note that the government will probably have to pay some premium to make up for the ongoing uncertainty emanating from the GCC crisis,' it said.
Yields have spiked since the outbreak of the crisis in early June, and tightening credit conditions globally are further adding to these pressures, with yields standing at 4.3% at the time of writing, from a pre-crisis level of 3.4%.
"Given our expectations for further tightening ahead, borrowing costs look poised to rise more substantially over the longer term," it added.
Despite rising debt levels and servicing costs, BMI sees little risk to Qatar's fiscal stability. "With hydrocarbon prices heading higher and hydrocarbon exports continuing undisrupted, the budget balance will steadily improve — swinging back into surplus by 2023, according to our projections," it said.
Meanwhile, public debt levels are still low on a global comparison, estimated at 55.8% of GDP as at end-2017, allowing the government space to borrow without risking a material deterioration in its sovereign profile.
Qatar’s sovereign wealth fund assets (a sizeable share of which is believed to be relatively liquid) are valued at well over 200% of GDP — far exceeding public debt, which will continue to underpin investor confidence in the government's repayment capacity over the coming years — even in the event of disappointing hydrocarbon earnings, or a dragged out GCC-crisis, leading to slower-than-forecast deficit reduction.