Qatar faces harsh economic fallout

An increasingly isolated Qatar will have to pay a heavy price in terms of an impending economic slowdown, credit downgrades, soaring inflation, liquidity squeeze and increased funding costs if the ongoing diplomatic rift with a group of Arab countries persists, economists and credit analysts warned.

While Standard & Poor's downgraded Qatar's debt on Wednesday, Moody's Investors Service said the Gulf country's credit quality would decline if tensions with fellow GCC countries continue indefinitely.

Steffen Dyck, vice-president and senior credit officer at Moody's, said should the rift between the GCC countries persist, it would be credit negative for Qatari banks, owing to their reliance on confidence-sensitive foreign funding, which currently accounts for 35 per cent of total liabilities.

"We expect that Qatari banks' funding costs will likely rise for debt securities [11 per cent of foreign funding], and there is a risk of withdrawals from non-resident deposits [43 per cent of foreign funding] and interbank facilities [46 per cent of foreign funding] because a portion of these are sourced from the GCC," said Dyck.

Garbis Iradian, chief economist, Mena at the Washington-based Institute of International Finance (IIF) said in a more pessimistic scenario which assumes that sanctions remain in place for an extended period and ties deteriorate further, Qatar's headline growth could decline to 1.2 per cent in 2017 and two per cent in 2018, principally due to lower non-hydrocarbon growth impacted by increased uncertainty weighing on investment, a tighter financial environment and perhaps deposit flight which could raise the cost of funds. "Cuts in financial ties and increased counterparty concerns could hinder ease of doing business and trade finance."

S&P downgraded Qatar's debt as the riyal currency fell to an 11-year low amid signs that portfolio investment funds were flowing out of the country.

The US dollar was bid as high as 3.6526 riyals in the spot market on Wednesday, its highest level since July 2005, according to Thomson Reuters data. The riyal is pegged at 3.64 to the dollar by the central bank, which only allows small fluctuations around this level. In the offshore forwards market, which banks use to hedge against the risk of future moves in the spot rate, the riyal dropped as far as a 550-point premium against the dollar, its lowest level since December 2015.

The rating agency cut its long-term rating of Qatar by one notch to AA- from AA and put the rating on CreditWatch with negative implications, meaning there was a significant chance of a further downgrade.

Moody's Investors Service assesses Qatar at Aa3, which is equal to S&P's new rating. Fitch Ratings puts Qatar at AA.

S&P said Qatar's economy would suffer from the decision on Monday of Saudi Arabia, the UAE, Egypt and Bahrain to cut diplomatic and transport ties with Doha.

"We expect that economic growth will slow, not just through reduced regional trade, but as corporate profitability is damaged because regional demand is cut off, investment is hampered and investment confidence wanes," S&P said.

Qatar's stock index has tumbled 9.7 per cent over the past three days, with high trading volumes suggesting some Gulf and international investors were bailing out of the market and sending their money home. Before this week's crisis, Gulf and international investors held only about nine per cent of Qatar's stock market, which had a capitalisation of about $150 billion, bourse data showed.

Malgorzata Glowacka, associate analyst at Moody's, said Qatar's liquidity squeeze could intensify in the event of further escalation of tensions, which could include restrictions on capital flows or change in investor sentiment. The rift could also be negative for regional economies, business confidence and credit growth opportunities for GCC banks if it persists.

Iradian said Qatar's liquidity pressures could increase if the government opts for more withdrawal of its deposits with domestic banks to finance the deficits. Also, private resident non-residents deposits could decline from their peak level in April 2017.

"If the rupture is prolonged and alternative trade routes emerge, this could cause exporters, particularly in the UAE and Saudi Arabia, to also be adversely impacted. Imports from the UAE, Saudi Arabia, Bahrain, Egypt and Jordan account accounted for about 16 per cent of Qatar's total imports in 2016, or three per cent of GDP. With numerous firms using Dubai as their regional distribution hub, the UAE accounted for more than half of this amount," said Iradian.

Analysts expect prices of food and other essential items, a bulk of which were imported into the country through Saudi borders, would escalate with the closure of borders and ban on land, sea and air cargos from the UAE, Saudi Arabia and Bahrain.

Qatar's exports of services amounted to $15 billion in 2016, of which $13.5 billion was travel and transportation related. About half of the number of visitors to Qatar is from the GCC.

"With the imposition of travel and flight bans, as well as loss of access to neighbouring countries' territory, exports of services are likely to be impacted significantly," said the IIF.

Source: Khaleej Times