Qatar’s budget appears to be attempting to protect capex expenditures while rationalizing current spending, a report said, highlighting that the 2016 budget pencils in a deficit of $12.7 billion based on oil prices of $48 per barrel.

Qatar’s budget appears to be attempting to protect capex expenditures while rationalizing current spending, a report said, highlighting that the 2016 budget pencils in a deficit of QR46.5 billion ($12.7 billion) based on oil prices of $48 per barrel (/bbl).

 The comparison to previous years is blurred by the change in fiscal year (from end-March to calendar-based) and as the 2015 fiscal outturns have not been officially released yet, added the report by Bank of America Merrill Lynch (BofAML) titled “GCC trip notes; Gradual labour recovery in Mexico” authored by the GEM Fixed Income Strategy & Economics Global team at Bank of America Merrill Lynch.

 Compared to the FY15 budget, the 2016 budget pencils in lower spending by 7 per cent due to current spending being budgeted 18 per cent lower but 11 per cent higher capital spending. Compared to the FY15 realized outturn, the 2016 budget pencils in lower spending by 5 per cent due to current spending budgeted 25 per cent lower but 45 per cent higher capital spending.

Still, capex prioritization underway

Data from the Middle East Economic Digest (MEED) suggests a material drop in contract awards in 1Q16, concurrent to the deep oil price correction. In our view, this suggests government restraint on non-essential capex spending, as well as caution due to the oil price drop.

A material slowdown in government infrastructure spending is not reflected in population growth figures, although the data is challenging to interpret and reconcile with anecdotal evidence of some downsizing in the broader quasi-government sector.

 

External issuance to fill the budget gap

At oil prices of around $33/bbl, we anticipate the fiscal deficit would widen to QR57 billion ($15.7 billion or 11.2 per cent of GDP). “However, proceeds from the administered price adjustments (gasoline, diesel, electricity and water, etc) are likely to help bring the budget deficit closer to target, in our view,” BofAML said in the report.

The recent raising of a 5-year $5.5 billion syndicated loan at Libor + 80bps help cuts borrowing requirements in the remainder of this year. We anticipate the bulk of the remaining fiscal gap is likely to be filled through sizeable external bond issuance.

Authorities have indicated they do not intend to draw down on the foreign assets of the Qatar Investment Authority (QIA) for fiscal purposes, although the Ministry of Finance (MoF) maintains reserve accounts at the QIA to cover a few years’ worth of sovereign external debt repayments. The Qatar Central bank (QCB) capital increase conducted by the government over the past 1.5 years (reclassified from dues to capital and reserves) will likely help it present a stronger balance sheet to markets.

 Possible tectonic shift in energy policy

Potential supply pressures on the LNG gas market (stemming from increased competition in Asian markets from countries such as Australia, for instance) may mean Qatar could follow in the steps of Saudi Arabia and shift its gas energy policy from defending prices to defending market share.

Most of Qatar's long-term contracts appear to expire from 2020 onwards, suggesting some rollover risk. That being said, Qatar is the most cost-competitive of all LNG producers, partly thanks to full vertical integration, and is well placed to weather the storm, in our view.

Qatar is showing increased flexibility in response to market changes, including on pricing. More spot sales are being conducted (25-40 per cent of capacity has allocation flexibility through diversion clauses), and participation in tenders or sales through trading houses may have allowed increased supplies to a number of Middle Eastern countries.

While contractual disputes in the past with European utilities led to arbitration proceedings, India’s Petronet successfully renegotiated a long-term contract with RasGas and nearly halved its purchase price from $13 million BTU to $7 million BTU by changing its oil indexation clause from a five-year average to a three-month average.

“Unlike the Indian contract, our estimated implied blended LNG export price for Qatar suggests that the majority of Qatari contracts have purchase terms that reflect oil prices more closely, which should diminish contract renegotiation risk, in our view,” BofAML said in the report. – TradeArabia News Service