June 10, 2021:
Macro: Back to (gas) basics
Qatar's renewed Liquefied Natural Gas (LNG) expansion plans could have important economic and market implications over the medium-term. Qatar Petroleum (QP) is planning to increase LNG production capacity in 2027 by 63% to 126mtpa. We estimate the economy could now double in size, with nominal GDP reaching cUS$300bn by 2027. This is likely to boost sovereign creditworthiness, economic activity and twin surpluses. Still, the growth model post-2027 is unclear without reforms.
Qatar - GCC macro ties not yet warming up
The resolution of the Qatar-Gulf Cooperation Council (GCC) rift is unlikely to lead to major macro gains, in our view. Underlying policy orientations and differences between Qatar and the Quartet are likely to remain in place. Economic links are likely to be only resumed partially and gradually at this stage. Qatar's sovereign wealth and robust policy response have also sheltered it from the worst effects of the Covid crisis.
Qatar could become the swing LNG producer
Qatar's LNG strategy appears to be focused on defending and, in due course, growing its market share. We estimate its existing LNG contract rollovers start from 2022 onwards. Qatar's structural cost advantage makes it well positioned to retain its pre-eminent supplier position, while allowing for greater flexibility in contract pricing.
LNG expansion plans to boost sovereign creditworthiness
We expect the LNG expansion plans to boost real GDP growth and fiscal surpluses to high-single digits and mid-single digits on average over 2021-27. We estimate the LNG investment pipeline could boost non-hydrocarbon real GDP growth by 1.5ppt per annum, bringing it to average c5.0% over the period 2022-27.
Equity Strategy: bullish QNB and IQCD
The improving Qatar National Bank (QNB) operating metrics support our bullish view on QNB, with valuation failing to reflect the more favourable economic outlook. LNG expansion could allow greater availability of domestic feedstock. We remain bullish on Industries Qatar (IQCD) due to our expectations for a robust fertiliser pricing outlook.
EXD Strategy: reduced external issuance a key positive
Reduced issuance could allow Qatar spreads to gradually tighten versus other high-rated Emerging Markets (EM) peers, especially post-QP issuance. We see medium-term risk of outflows of US$10bn, should Qatar lose Emerging Markets Bond Index (EMBI) eligibility due to surpassing EM income and cost of living thresholds. Still, given Qatar's weight, investors could instead treat most of their exposure as off-benchmark positions.