Analysis - Economic Trends
Indicators of the Crisis
Will Qatar’s Financial Position be affected by the Gulf Countries’ Boycott?
Wednesday، June 21، 2017
The past days have seen many developments indicating that Qatar’s financial position started to feel the pinch of the current crisis between itself in one hand, and Saudi Arabia, the United Arab Emirates, Bahrain and Egypt on the other hand, after the four countries severed diplomatic and economic relations with Doha.
The ongoing crisis has led to the country's economy losing many essential elements necessary to maintain financial stability, leading to a substantial decline in sectors that generate foreign currency-income such as: civil aviation, tourism, export, along with a fall in direct and indirect foreign investments inflows to Qatar. This is attributed to investors' fears of instability ensuing from the current crisis, particularly over the long term.
Questions abound concerning the future of Qatar’s financial position, the ability of its economy to withstand the current financial pressures, which are likely to intensify if the crisis remains unresolved.
Manifestations of the Financial Crunch
Since the crisis erupted between Qatar and the Gulf countries, Qatar’s economy showed many signs of the financial crunch, according to the following:
1. Reduction of the credit rating: last weekend, Standard & Poor’s, the global credit ratings agency, downgraded Qatar’s long-term sovereign debt rating one notch to (AA-) instead of (AA), and put it on credit watch list with negative implications, meaning that there is high probability for new credit rating cuts for the country over the coming period.
S&P said the country's economy was adversely affected by the severance of diplomatic relations, predicting economic growth to slow down. The company justified its rating not just because of declining regional trade, but also because of the damage to the corporate profitability due to weakened regional demand for its products, diminished investments and dented confidence in the business climate.
In the same vein, Moody's global credit rating agency cut Qatar’s rating from (AA2) to (AA3), attributing this move to the weakness of the country's external position and the uncertainty that surrounds the sustainable growth model in the next few years. Moody’s reviews did not stop only at the credit rating of macroeconomics aspects of Qatar, but also lowered the credit ratings for major oil and gas companies and real estate companies. Such companies included RasGas company, Qatar Petroleum Company, Industries Qatar Q.S.C, Qatari Diar Real Estate Investment Company (QDREIC) and Qatar Gas Transport Company Limited (Nakilat), company specialized in shipping. The downgrade also included Ras Laffan Industrial City, a huge industrial area for liquefying and exporting natural gas.
2. Devaluation of the local currency: although Qatar’s currency (Riyal) pegged to the US dollar, the exchange rate system allows the currency to trade in a narrow range, enabling the exchange rate to move up and down within that range. Since the beginning of the crisis between Qatar and Gulf countries, the currency exchange rate has witnessed an unprecedented decline in years. The dollar rose versus the Qatari riyal from 3.6436 riyals per dollar to 3.6703 riyals per USD, which means the country’s currency plummeted to its lowest level since October 2008, amid signs of a massive exodus of foreign capital owned by investment funds.
Some reports indicate that foreign currency inflows to Qatar are subnormal, especially after falling currency inflows from the Gulf countries, mainly Saudi Arabia and the United Arab Emirates.
In response, Qatar Central Bank (QCB) asked commercial banks to provide details of customer deposits of Gulf Cooperation Council (GCC), Egypt and other countries on a weekly basis. QCB also asked the banks to submit detailed and regular information about foreign currency trading, as well as on withdrawals from deposits, liquidity and money transfers. Under normal conditions, such information was requested on a monthly basis, reflecting the anxiety of the institutions responsible for monetary policy in Qatar amid the current crisis.
These data have prompted the QCB to pump large amounts of dollars in the spot currency market to keep the exchange rate under control, yet it is unclear how can the QCB sustain such policies.
3. Rising Cost of debt-insurance: the last period saw a substantial rise in the cost of the country’s sovereign debt-insurance against the risk of default, following downgrading the country's credit rating. Fitch credit rating agency has put Qatar debt (AA) on credit watch, in preparation for a possible cut in the short period ahead. Citing fears of sustain crisis, Fitch said that it was more likely that the crisis would be sustained and negatively affect Qatar’s economy.
4. Qatar’s Stock Market underperformance: following the decision by Saudi Arabia, the United Arab Emirates, Bahrain and Egypt to sever ties with Qatar; Qatar stock market was in shock. During the first session following that decision, stock market general index lost 701 points, during the second session, it shed 238 extra points, retreated to 8965 points compared to 9923.6 points in the day before the decision to sever ties.
Accordingly, the country stock’s market general index shed 9.7 percent during two sessions only. Although the index has seen some stability in the following trading sessions, the level remained far below what it was before the crisis. On June 13, it spins around 9077 points, down by 846 points, or 8.5 percent before the crisis.
The anxiety that currently grips investors in Qatar stock market, push them to liquidate their financial positions to avoid losing their capital, which means selling their stocks and finding alternative financial markets. It was evident in the case of Gulf investors during the past days, who moved their investments to their national markets, especially since a large proportion of them belong to the countries boycotting Qatar. Thus, they would stay out of the market, depriving Qatar of their investments if the crisis to continue.
Impacts of a Protracted Crisis
Consequently, an important question arises: what is the ability of the Qatari’s economy to weather the financial pressures ensuing from the current crisis with Gulf states and Egypt? Here it should be noted that the country's economy has substantial reserves of foreign currencies, particularly the US dollar, with foreign reserves at the central bank amounts to USD 37 billion, and the Qataris’ sovereign wealth fund has various assets around the world worth USD 335 billion. These funds constitute a buffer for the country's economy against the current crisis, the government can draw from these assets and inject into the backbone economy to offset the decline in liquidity in general, and in the foreign currencies in particular, in order to prop up its economic performance.
However, if the current crisis drags on for a long period, it will lead to two important developments that make the ability of Qatar’s economy to maintain its performance at the same pace almost impossible. The first is a sharp decline in central bank reserves and Qatari sovereign wealth fund assets to a level that does not allow the withdrawal of more money. The second one is that with the passing of time, the country's economy needs of foreign currency will increase. The prolonged crisis reduces the ability of the cash-generating sectors to maintain income levels, such as aviation, tourism and export sectors, not to mention foreign investment and natural gas etc. Thus, at that time when the country's economy needs more foreign currencies to meet the usual requirements, it will face shortages in the very sources of this income.
In conclusion, one can say that the ability of Qatar’s economy to weather the current crisis hinges on the time span; the longer the crisis the sooner the economy will feel the crunch a little by little, its crisis would gradually turn into an insurmountable problem. Its financial conditions would head towards a dangerous turn, suffers a rapid decline in the value of the local currency, loss of creditworthiness, and a sharp decline in its capacity to implement its planned mega projects, upon which the state relies to underpin the country's economy in the coming decades. Hence, the economy would enter a downward cycle of growth rates that will see growth turn to contraction in the long run, which could ultimately lead to Qatar losing its economic status at the regional level.