Fixed Income: Oil-Rich Qatar

• We acknowledge the huge steps taken to improve the life for migrant and domestic workers

• According to our proprietary NFA Model, oil-rich Qatar has one of the highest Net Foreign Asset positions globally

• The beauty of our Relative Value Model is that it highlights mis-priced bonds in the market such as Qatar 2040s
   

  With the FIFA world cup less than four months away, we thought we’d have a look at one of our favoured “wealthy” nations, Qatar. In preparation for the World Cup the nation has come under much scrutiny regarding, in particular, labour rights; reforms for which it put in place in 2019. During the International Labour Conference last month, Qatar was praised for the progress it has made in worker’s welfare and labour rights, according to a FIFA report. The nation has introduced into law a new minimum wage, regulation on overtime pay and legislation for labourers working in high temperatures. We are cognisant that there is still more the nation can do, however, acknowledge the huge steps it has taken to both legislate, and eliminate discrimination and improve the life for migrant and domestic workers.

  Politically, relations between Qatar, and the GCC and Saudi Arabia have been normalising. Importantly, Qatar’s status in global energy markets has ramped up, following supply concerns from Russia, and the subsequent agreement to supply Germany with gas. Moreover, the European Commission closed its antitrust investigation into state-owned Qatar Energy, and relations with the US have firmed, following Qatar’s part in promoting security and stability in Afghanistan and its mediation between the West and Tehran. 

  Oil-rich Qatar has the highest GDP per capita, and according to our proprietary NFA Model, has one of the highest Net Foreign Asset positions globally, estimated at ~315% of GDP this year; thus, very comfortably a 7-star nation. In addition, a proposed increase in LNG production by around 64%, or 126 million tonnes annually, between 2025-2027, coupled with current high oil and gas prices will continue to support the nation’s budget surplus, which is estimated at 15% of GDP this year, versus 2.4% of GDP last year. Moreover, the nation’s balance sheet and huge hydrocarbon reserves and high-income levels provide significant cushion in case of revenue decline due to oil and gas price shocks, as experienced during the pandemic. 

  The Aa3 rated sovereign bonds have enjoyed a recent bounce, particularly at the longer-end, where we are positioned. The 6.4% 2040s for example are up four points from the June lows, a tightening of 35bps to a yield of 4.52%. Trading at a spread of 137bps over USTs the bonds continue to offer attractive risk-adjusted returns of ~6%, with 2.3 notches of credit cushion. We could compare this with widely held AT&T 7% 2040s, which also has an 11-year duration and a yield of 4.42%. This BBB+ rated bond is currently trading through “fair value” with an expected return of -0.4% and no notch protection. One would expect that a lower rated BBB+ corporate bond would offer more in the way of risk premium compared to a higher rated Aa3 sovereign bond with the same duration. This is the beauty of our Relative Value Model which highlights mis-priced bonds in the market such as Qatar 2040s.