Qatar row: The business gulf

The move by five Arab countries to sever diplomatic ties and break off all land, air and sea connections with Qatar following the escalation of simmering tensions will have immediate ramifications across a wide spectrum of economic and commercial activities in Qatar, within the wider Gulf region and globally.

First, on the bilateral front, the closure of land, air and sea transportation between the UAE and Qatar will have an impact on the two-way trade and investment sectors.

What about VAT?

On a regional level, apart from the political fall-out that threatens to break up the 36-year old regional unity, the introduction of the long-awaited GCC wide uniform tax regime, VAT, will have to face a likely setback, further derailing the elusive monetary union sought by the six-nation bloc.

In May, Qatar became the second GCC member state after Saudi Arabia to formally endorse the path-breaking VAT Framework that will come into force from January 2018.

On the global front, the isolation of Qatar is not expected to have any sudden impact on oil prices as the peninsula state, one the richest in natural gas reserves, has only limited oil output. "It will have minimal disruptive impact on global supplies and prices," an oil market analyst said.

The escalation of tensions had pushed up oil prices earlier on Monday, but they have since more than reversed those gains.

While Qatar, which depends heavily on re-exports of food items and other merchandise from the UAE and Saudi Arabia, will have to bear much of the adverse impact, the real estate sector in the UAE will likely face temporary setbacks amid the clouds of uncertainty engulfing the cross-border investment scene.

Two-way trade impact

The two-way trade between the UAE and Qatar is estimated at around $9 billion. That will take much of the brunt of this decision. In addition, Dubai's property market, which that saw a major jump in investments to the tune of Dh2 billion in 2016, is likely to be impacted.

The number of Qatari investors entering the Dubai property market surged in 2016 to hit 1,006, while an estimated 231,000 Qatari visitors arrive in the UAE every year for business and holidays. The number of Emirati visitors to Qatar is more than 117,000.

Flying low

In the field of air transport, the number of flights operated by four UAE carriers and Qatar Airways stands at 175 frequencies a week.

For more than 1,080 UAE companies operating in Qatar and 4,200 Qatari companies in the UAE, the real impact of the current crisis is yet to be experienced.

Level playing field?

Kristian Ulrichsen, a Gulf expert at the US-based Baker Institute, said a lengthy closure of the airspace and land borders could be bad for the timeline and delivery of the World Cup, which Qatar is hosting in 2022.

Other potential long-term impact of the crisis could include a fall in economic growth - the construction sector is a key driver of the Qatari economy and is partially dependent on overland routes for supplies - and risks to viability of World Cup.

Food for thought

"Qataris will have face the prospect of food price escalation following the stoppage of supplies from neighbouring GCC countries. The retail and construction sectors, both heavily dependent on imports via Saudi Arabia and the UAE, will take an immediate hit with the borders closing and air connections coming to a halt," said K.V. Thomas, Managing Director of Thomsun Group of Dubai.

"Food security will be a critical challenge for Qatar given the only land transport is through its single border with Saudi Arabia. About 40 per cent of Qatar's food is believed to come via Saudi border route. The closure of the land border by Saudi Arabia and half to air cargo from the UAE and Bahrain will immediately stoke inflation and that will directly affect normal Qatari people," Thomas said.

Up in gas

Uncertainty over the operational status of the natural gas pipeline from Qatar to the UAE and Oman is also lingering although it was operating normally on Monday despite the flare-up.

Qatar is the world's largest exporter of Liquified Natural Gas, and the Dolphin pipeline that runs from Qatar to the UAE accounts for around a quarter of the UAE's daily LNG consumption.

Taking stock

Qatar's stock market had fallen by eight per cent on Monday after the news of severed ties was released, while oil prices rose by one per cent.

FXTM's Jameel Ahmed said stock markets across the region had encountered unexpected selling pressure following this development of political risk across the Gulf, with the potential for political risk being something that was not priced into the regional markets beforehand and has resulted in the stock markets being caught off-guard.

This time it's different

Citi Research analysts said the current crisis is significantly more serious than the incident in 2014, when comments made by a Doha-based cleric sparked a row that resulted in a severing of diplomatic ties between March and November of that year.

"This time, the sanctions against Qatar go well beyond the diplomatic, and include closing of the land border between Saudi Arabia and Qatar; expulsion of Qatari nationals, suspension of all flights between Qatar and its Gulf neighbours (Saudi, Bahrain, UAE, and Yemen); and the closing of these Gulf neighbours' airspace to Qatar's national carrier, Qatar Airways," they said.

"While we think the near-term impact of the crisis is easily containable by Qatar, which has substantial resources it can employ, we see considerable risks regarding the economic and financial impact of these sanctions the longer they remain in place," Citi analysts said.

Banking on historic ties

Jason Tuvey, analyst at Capital Economics, said one potential concern is that Qatari banks may now find it more difficult to secure wholesale financing, which could precipitate a more abrupt cooling of the country's credit boom. However, history suggests that tensions could quickly de-escalate, said Tuvey.

Analysts see so many uncertainties, particularly with respect to the likely duration of the sanctions. The markets are now repricing the curve, on the back of the obvious uncertainty around the financial/economic repercussion on the sovereign credit.

Source: Khaleej Times