Qatar's debt build-up raises concerns

Qatar has accumulated large debts in recent years. Its strong economy means few are worried, but could Doha be storing up problems for the future? Published in MEED, 18 May 2012

Qatar, the country with the highest per capita income in the region, is developing a debt habit once again. Over the past two decades, the government’s debt first swung up and then down. Right now it is very much on the up.

Estimates of the size of the country’s debt burden vary, but it is clear that it has increased substantially since March 2008, when it was less than QR30bn ($8.2bn). The most recent figures available from the Economy & Finance Ministry are for 31 March 2011 and put the total at QR194bn. According to the IMF, the figure has increased to QR215bn since then.

For now, there appears to be little concern in the market. After all, the economy has been growing fast, and oil and gas revenues, in particular, have shot up, from QR275bn in 2008 to an expected QR516bn this year, according to Qatar National Bank (QNB).

Debt burden

Nonetheless, the build-up of debt could still lead to some problems in the future, particularly if oil and gas prices fall or if some of Doha’s megaprojects and diversification efforts falter in any way.

“There’s been quite a substantial increase in the government’s debt burden,” says Trevor Cullinan, primary credit analyst at US ratings agency Standard & Poor’s (S&P). “We obviously take it into account, but we’re more interested in the government’s net asset position, which is still very strong.

“With regards to the debt of public sector entities, it’s mostly related to the oil and gas sector, so we don’t have any significant concerns at this point, but it is certainly an issue for the Qatari government that they choose the right projects and invest in a way that gives them a positive return over the medium to long term.”

Much of the debt raised by Qatar in recent years has been used to finance the development of its gas sector, including a series of liquefied natural gas (LNG) projects. With huge revenues now coming in to the government’s coffers from these developments, there is no pressing financial need to raise more debt, but equally there should be no problem in repaying the bills and bonds as they fall due.

The debt build-up is not just about financing the development of its energy infrastructure, however. The government is also keen to increase liquidity among local banks and improve the depth of the capital markets. This will, it hopes, spur the development of the financial sector and also the wider economy.

To this end, Qatar Central Bank (QCB) is pressing ahead with a programme to release QR4bn of short-term treasury bills each month, which it began in early 2011. The government is also selling foreign currency bonds.

As of mid-April, there were some QR14bn in outstanding treasury bills. In December, the government issued $5bn in bonds in three tranches, with maturity dates ranging from 2017 to 2042. It was the largest debt issue in the GCC that year and was heavily oversubscribed. S&P rated the bonds at AA, its third highest score, while rival agency Moody’s Investors Service gave it a rating of Aa2. Those ratings suggest that investors have little to worry about when it comes to Qatari government debt, but Moody’s did strike a note of caution at the time, saying that it had “some concerns about the country’s accumulation of external debt within the public sector in recent years”.

Speaking at a conference in Doha on 16 April, QCB governor Sheikh Abdullah bin Saud al-Thani, explained the government’s strategy. “An essential element of the Qatar National Vision is a stable and efficient financial system capable of increasing liquidity, which can be allocated to the most appropriate projects, and so promote a diversified and modern economy,” he said.

The central bank was issuing short-term treasury bills “in order to further develop the market of government bonds and facilitate liquidity management”, he added.

State entities

It is not just central government that has been accumulating debt in recent years. Several companies that are wholly or partially owned by the state have also been borrowing heavily.

Among those with significant amounts of debt are Qatar Petroleum (QP), which has some $22bn in debts according to its most recent financial accounts, and Qatar Telecom (Qtel) with $12.5bn of borrowings, $7bn of which is due to be repaid between now and 2014. Others include QNB, with $11.3bn in liabilities, Qatari Diar, which has $7bn in unsecured bonds and Qatar Electricity & Water Company (QEWC) with borrowings of about $4bn.

For anyone that has been following the Gulf economies over recent years, this accumulation of debt by companies affiliated to the state will prompt uncomfortable reminders of what happened in Dubai. Government-related entities such as Dubai World and its subsidiary Nakheel found themselves unable to repay bonds in late 2009 and pushed the emirate into a recession from which it is still struggling to emerge.

Financial strength

The financial position of Qatar is far different to Dubai, however. Government revenues in Doha are large and despite the increase in spending in recent years, the Economy & Finance Ministry still operates a healthy budget surplus.

“Qatar is extremely creditworthy,” says one Gulf-based economist. “It is in an extremely solid position. They are spending, but they have revenue growth as well. They have strong gross domestic product (GDP) growth and alongside the UAE, they have the highest level of political stability in the region. So it remains a strong story of creditworthiness and growth.”

Nonetheless, these debts are being built up at a time when many international banks are trying to cope with the losses they sustained during the last economic downturn. That means that the appetite for further lending, even to companies closely linked to the Qatari government, could be limited according to some analysts. “There’s negligible government debt, but the debts associated with government-related entities are sizeable,” says Rachel Ziemba, a director at research firm Roubini Global Economics in London.

“I don’t think that’s unfinancable, but there might be limitations as to how much, in a period of global deleveraging, we’ll see the ability to issue more debt. Qatar is better placed than Dubai. I’d see it more as limiting future growth and creating speed limits rather than a crisis.”

The ability of Qatari GREs to borrow is helped by the perceived willingness of the government to offer support in the event that they start to struggle. It is this for this reason that Qatari Diar has a rating of AA from S&P, putting it at the same level as the sovereign.

The government has already shown a strong willingness to support the country’s banks, which also helps to bolster investor confidence. Between 2009 and 2011, the Qatari government injected three tranches of capital into the banks worth a total of QR11.2bn, bought QR6.5bn of their equity investments and relieved them of QR14.4bn of their real estate loans.

In the longer term, there is a risk here. If the government is seen to be supporting the banks no matter what they do, they may be encouraged to lend irresponsibly.

For now, the proportion of non-performing loans remains low at about 1 per cent, according to QCB. This is despite the rapid expansion of credit, which grew by 16 per cent in 2010 and a further 28 per cent in 2011, according to the central bank. The public sector accounted for almost 40 per cent of the credit last year, a proportion that has been steadily rising since 2006.

Qatar’s wealth and the relatively small size of its economy means that the government can afford to keep borrowing and to support its banks and other companies in a way that Dubai simply could not.

“There might be some debt not supported by the government, but I’d say most of it is in companies that are very tied in to the domestic diversification or revenue goals, so I can’t see them walking away from that,” says Ziemba.

Foreign assets

The government is thought to have sizeable assets that it can draw on to offer more support in the future if needed, mainly through its sovereign wealth fund, the Qatar Investment Authority (QIA). However, the true extent of its wealth is unclear.

“The lack of transparency with regard to the government assets is a weakness,” says Cullinan. “It’s clear there have been huge surpluses over the past years. We assume it is being invested by the QIA abroad and we assume that in the event of financial difficulties, those assets would be used to support the Qatari economy. But it’s true there isn’t much clarity on the value of the assets held by QIA or how liquid they are. We know they have substantial assets, but we don’t know how much.”

Perhaps wary of testing the assumptions of investors too much, the Qatar government is in any case expected to reduce its level of debt in the years ahead. While gross government debt has risen from 8 per cent of GDP in 2008 to 31.5 per cent last year, this has now stabilised and over the medium term, is expected to fall. According to the IMF’s projections, the government’s net debt will fall from 30 per cent of GDP this year to less than 26 per cent in 2014 and under 23 per cent by 2016.