Qatar state bonds given Aa2 rating with stable outlook

Oil and gas fiscal surpluses are being used to build assets abroad. (AFP)

Moody's Investors Service has awarded Aa2 rating to Qatar for foreign and local currency government bond with a stable outlook.

The rating reflects the country's very high level of prosperity and robust public finances, which continue to strengthen as hydrocarbon export receipts are accumulated, Moody's said in its new sovereign credit report.

"The ratings were last upgraded in July 2007, from Aa3, chiefly to reflect the growing resilience of the Qatari Government's balance sheet as oil- and gas-driven fiscal surpluses are funnelled through the state-owned Qatar Investment Authority to build up financial assets abroad. These assets, which are mostly invested in non-hydrocarbon sectors, provide an 'oil hedge' and their returns contribute to the country's gross national income," said Tristan Cooper, Moody's Vice-President and author of the report.

Qatar's ratings also reflect the extremely rapid expansion in the domestic economy's productive capacity as more upstream and downstream hydrocarbon export projects are brought on line.

"Qatar is already the world's largest exporter of liquefied natural gas (LNG) and it plans to more than double its LNG export capacity by 2010. With consensus forecasts indicating oil prices will remain at elevated levels over the medium term, this will further boost the country's GDP per capita, which is already the highest in the world in purchasing power terms," said Cooper.

He added: "The most pressing short-term challenge for Qatar, as in other emerging markets, is inflation, which is undermining competitiveness, creating economic distortions and could raise social tensions. Inflation is being exacerbated by very strong growth in government expenditure and the currency peg to a weak US dollar."

Finally, although the government's direct debt remains small, its contingent liabilities are rising rapidly given growth in the liabilities of government-owned corporates and banks.

Cooper warned while much of the country's corporate debt is being used for highly profitable hydrocarbon export projects, Moody's has some concerns with regard to Qatar's banks.

Given their aggressive loan growth, banks' asset quality could suffer, particularly in the event of a sharp correction in realty prices.