Analysis - Economic Trends
Economic Repercussions of Gulf-Qatar Rift
Tuesday، June 13، 2017
The Qatari economy is almost completely isolated after Saudi Arabia, the United Arab Emirates, Bahrain, Egypt and other countries such as Yemen, Libya and the Maldives, severed diplomatic and economic ties with Doha on June 5. The measures taken by the states further included cutting off all air, land and sea routes with Qatar.
The rift’s repercussions on Qatar’s economy began to unfold, considering Saudi Arabia’s, UAE’s and Bahrain’s significance to Qatar’s movement of foreign trade and passengers. This is in addition to Qatar’s direct economic relations with these countries, as many of Qatar’s economic sectors depend on these countries. Therefore, economic losses are expected as a result of Qatar’s current crisis with Gulf countries, including the following:
1. Instability of Foreign Trade
Qatar’s foreign trade will probably be significantly affected as a result of isolating the country’s economy. Statistics indicate that Qatari exports reached USD 65 billion in 2016. Around USD 6.5 billion, i.e. 10 percent of these exports, went to Saudi, Emirati, Bahraini and Egyptian markets. Qatari imports amounted to USD 34 billion in 2016. USD 5.1 billion, an average of 15 percent of these imports, came from the three Gulf countries and Egypt.
Accordingly, severing ties with Qatar threatens the stability of around 11 percent of Doha’s foreign trade. This percentage amounts to USD 11.6 billion. This will not only affect Qatar’s foreign trade, but it will also pressure all economic activities related to it and eventually affect the entire economy.
Qatar’s trade via land routes will suffer huge losses. Saudi Arabia, the only country that has land borders with Qatar, shut down Abu Samra land border crossing that links it with Qatar. This will result in several problems in the Qatari markets, particularly in the consumer goods markets. Around 800 trucks pass through this border crossing daily carrying food, factors of production, construction material and other goods to Qatar. Qatari markets are thus expected to suffer due to shortage of these products and increase in their prices. The crisis escalated further as Saudi Arabia, UAE and Bahrain closed air and sea routes with Qatar thus disrupting all air and naval freight.
Qatari consumer goods markets will probably suffer the most as a result of these measures as these goods amount to around 27 percent of Qatari imports from Saudi Arabia, UAE and Bahrain, while “food and live animals for food production” amount to 16 percent of these imports.
2. The Construction Sector
The Qatari construction sector will suffer huge losses due to the severance of ties with Saudi Arabia, UAE and Bahrain. This sector hugely depends on investments and companies affiliated with Gulf countries. Statistics by the United Nations Conference on Trade and Development (UNCTAD) show that most Gulf investments in the country go to the construction sector.
A big percentage of construction material comes from Gulf countries, specifically through Abu Samra border. The interruption of these imports may delay construction projects for the 2022 Qatar World Cup. This will affect Qatar’s ability to host this global event, which the government counts on for reviving sectors such as tourism. It also hopes this event will improve the country’s competitive status in other sectors particularly those related to infrastructure, public facilities, culture, entertainment and hosting global events.
3. Decline in Foreign Investments
As the Qatari economy gets almost completely isolated after Gulf countries severed ties with Doha, the latter’s economic capabilities to attract direct foreign investment decreases. This is due to the Qatari market’s limitation and weak absorptive capacity in terms of foreign investment, especially that isolating Qatar has decreased operating firms’ ability to access markets in neighboring countries to export their products.
There is also the lack of diversity in available investment opportunities in Qatar as most of these opportunities are in energy and infrastructure sectors. The Qatari economy will also be unstable amid the isolation due to irregular supplies of raw material and factors of production. This is in addition to the decline of Qatar’s chances to attain funds from local and regional markets.
Bahrain, UAE, Egypt and Saudi Arabia are some of the most important investors in Qatar. Their investments in Qatar will decline or completely end as a result of severing ties. The Qatari economy will thus lose one of its most important pillars at the time being and many will lose their jobs. According to UNCTAD, the flow of direct foreign investment by Bahrain, UAE, Egypt and Saudi Arabia in Qatar between 2003 and 2015 reached around USD 22.2 billion. This represents 20.5 percent of total direct investments in Qatar at the time. These countries’ investments produced around 31,000 job opportunities in Qatari markets, i.e. around 34 percent of the total jobs produced by foreign investment at the time. These investments contributed to executing around 165 projects, which represent 28 percent of projects executed in Qatar.
4. Expected Financial Disturbances
The isolation of the Qatari economy poses a threat to the its financial capabilities and creditworthiness as this isolation limits the flow of capital due to suspending or decreasing activities that generate foreign cash such as civil aviation, export and re-export, tourism and foreign investment. As a result, foreign exchange reserve in Qatar will decrease. The Qatari government will then withdraw a lot from its financial buffers, including from its sovereign funds in order to provide the required liquid cash to fund the general budget deficit, pump funds in the banking sector and finance imports.
These new givens will reflect on Qatar’s credit rating, which will be more exposed and which will be reviewed in the upcoming days. Moody’s Investors Services, which in the end of last month lowered Qatar’s long-term foreign-currency bond and deposit ceilings to Aa3 from Aa2 said “the Gulf rift may influence Qatar’s credit rating during the upcoming phase.” Within this same context, the insurance cost on Qatari sovereign debt increased to its highest level in two months.
It’s believed that the Qatar Stock Exchange will suffer the most due to Gulf countries’ severance of ties with Doha. When cutting ties with Qatar was announced, the general index of the Qatari market declined by more than 8 percent. The National Bank of Qatar, the biggest bank in the country, contributed to more than 10 percent of its value. On the long run, the Qatari Stock Exchange is expected to lose its status as the second biggest financial market in the Arab world, after the Saudi market. That is because Arab and Gulf capitals exited Doha.
5. Losses in the Tourism and Civil Aviation Sectors
Gulf countries, which decided to sever ties with Qatar, banned its citizens from travelling to Doha. They also gave Qatari residents in their countries 14 days to leave. This poses a threat to the Qatari tourism sector.
Statistics show that more than 326,000 people crossed through the Abu Samra land border crossing between Saudi Arabia and Qatar between January 10 and February 5, 2017. This means that around 12,500 people cross daily. Closing the border crossing, thus, prevents around 4.6 million people from crossing into Qatar.
Airliners in the Gulf and in Egypt suspended their flights from and to Qatar. These airliners include Etihad Airways, Emirates Airlines, Air Arabia, Fly Dubai, Saudia Airline, and EgyptAir. This will not only affect passengers’ movement, but will also greatly limit the activity of tourism in Qatar via Gulf airports.
The Qatari civil aviation sector will also be negatively affected. It’s expected that this sector will suffer the most losses as a result of cutting ties. Qatar Airways will lose 50 daily flights distributed among the UAE, Saudi Arabia, Bahrain and Egypt. Depriving it from using airspace in Saudi Arabia, the UAE and Bahrain will force it to take alternative paths. This will increase the flights’ cost and duration and may also force them to pass through unsafe zones in other countries, such as in Iraq. This threatens some of the flights and makes them lose some of their competitive features and increases the insurance cost.