Qatar’s outlook cut by Moody’s amid Saudi-led blockade even as Gulf country aims to ramps up gas output

Key Points
  • Moody's cut the outlook on Qatar's sovereign credit rating to negative from stable.
  • Amid a Saudi-led blockade, Qatar planned to ramp up its LNG production capacity by 30 percent.
Skyline of Doha, Qatar.
Tim de Waele | Corbis | Getty Images

Despite Qatar aiming to ramp up its lucrative LNG (liquefied natural gas) exports in the midst of a tense diplomatic crisis, ratings agency Moody's has cut its outlook on the country's sovereign credit to "negative" from "stable".

The ratings agency said the change was due to the economic and financial risks arising from the ongoing dispute with Saudi Arabia and its allies, which accuse Qatar of supporting terrorism, an allegation the country has denied.

"The likelihood of a prolonged period of uncertainty extending into 2018 has increased and a quick resolution of the dispute is unlikely over the next few months," Moody's said.

The ongoing clash between Qatar and a coalition of countries, including Saudi Arabia, the UAE, Bahrain and Egypt, was still being negotiated. Qatar has responded to a list of 13 demands put forward by Saudi Arabia and its allies, but no details of the response were made public.

"I'm a bit surprised Moody's has downgraded Qatar," AMP Chief Economist, Shane Oliver, told CNBC's "The Rundown" on Wednesday.

"As far as I know, their export links are still operational, given that most of it goes by sea, so I don't really see what the financial risk is there." He added.

Qatar faces 'made to be rejected' demands

The coalition countries have enacted a series of measures, such as severing diplomatic relations, closing land, sea and air links, and expelling Qatari nationals from their countries.

Moody's said economic activity will likely be "hampered by the measures imposed so far."

"While Qatar's hydrocarbon exports are not affected at this stage, there have been reports of disruptions to certain non-hydrocarbon exports and a forced shutdown of helium production," it said.

Moody's added that the termination of direct flights between Qatar and coalition countries will affect services trade in areas including consulting and tourism. It said the crisis may also negatively affect business and foreign investor sentiment.

"Having said that, a swift resolution of the ongoing political dispute accompanied by a quick lifting of sanctions would potentially support a return to a stable outlook," it added.

Qatar plays the LNG card

In another signal that Qatar was prepared for a protracted dispute with the Saudi-led blockade, the country announced plans to raise its Liquefied Natural Gas (LNG) production capacity by 30 percent.

State-owned energy company Qatar Petroleum said increased production would come out of the largest natural gas field in the world, the North Field, which Qatar shares with Iran.

How Qatar's LNG plans affect Australia

"Qatar's lifting of the 12-year moratorium on the development of the North Field this April was a clear signal that the country wants to defend its position as the world's largest LNG exporter against market encroachment by new supplies from the U.S. and growing capacity in Australia," said Vandana Hari, founder of Vanda Insights.

The move would bring total LNG production up to 100 million tonnes a year by 2024, potentially worsening the global LNG glut.

"The outlook for oil remains bleak in the medium term on account of overcapacity and oversupply and in the longer term because of rapid growth in alternatives and energy efficiency in a decarbonizing world. Gas is a different story — it may not look promising for the next few years, but its future in the decades to come looks bright, as a cleaner-burning fuel," added Hari.

"It also holds promise as a complement to renewables, resolving the intermittency issue of wind and solar power, as they take on a larger share in the electricity market, which in turn is expected to grow exponentially," she said.

Other analysts said it's a display of strength and resolve from Qatar.

"They're trying to send a very clear signal that they won't be bent and bowed by this pressure, and I think it may have implications globally," Daniel Benaim, Senior Fellow at the Center for American Progress, told CNBC's "Street Signs" on Wednesday.