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Diplomatic and economic sanctions to have huge impact on Qatar’s economy

Rising cost of funds to hurt to hurt profits and valuations of private sector

Gulf News

Dubai: Recent diplomatic and economic sanctions on Qatar by a group of states led by Saudi Arabia, the UAE, Bahrain, Egypt, Libya, Yemen and a few other allied countries is expected to have severe consequences on Qatar’s economy if the impasse is to continue for a longer period, according to analysts.

The political rift has created much uncertainty and is likely to impact the flow of people, trade, and capital which could delay the execution of projects as Qatar prepares to host World Cup 2022.

With the crisis getting stretched, analysts fear a prolonged isolation of Qatar’s economy by its neighbours could result in Qatari economy facing sharp decline in growth.

According to Institute of International Finance (IIF), a Washington headquartered global association of the financial services industry, if the current crisis persists for an extended period and ties deteriorate further, Qatar’s GDP growth could decline to 1.2 per cent in 2017 and 2 per cent in 2018, principally due to lower non-hydrocarbon growth impacted by increased uncertainty weighing on investment and a tighter financial environment and perhaps deposit flight which could raise the cost of funds.

Qatar losing out on food and LNG

Cuts in financial ties and increased counterparty concerns could hinder ease of doing business and trade finance. “In this scenario, lower than expected nonhydrocarbon revenue could widen the deficit fiscal deficit to 7.8 per cent of GDP in 2017. The external current account deficit could remain at around 2 per cent of GDP as the sharp fall in travel and transport related service receipts due the prolonged travel bans of neighbours and airspace closures,” said Boban Markovic, Research Analyst at IIF.

While global credit rating agency Standard & Poor’s has downgraded the sovereign ratings of State of Qatar and changed the outlook of some of the leading corporate entities with negative implications, other rating agencies have warned of potential rating downgrade and or change in outlook to negative.

Five UAE-based carriers have suspended all flights

S&P was the first to lower its long-term rating on the State of Qatar to AA- from AA and placed the rating on credit watch with negative implications.

“We believe this will exacerbate Qatar’s external vulnerabilities and could put pressure on its economic growth and fiscal metrics,” said S&P’s credit analysts Benjamin Young.

This followed a number of rating related changes by S&P on Qatari banks and corporates ranging from downgrades to placing companies on watch list to changing outlooks from stable to negative.

Uncertainty costs Qatari stocks dearly

Following the sovereign rating action, S&P also lowered our long-term rating on Qatar National Bank (QNB) to ‘A’ from ‘A+’ and placed the Commercial Bank, Doha Bank, and Qatar Islamic Bank on credit watch negative.

“We believe the recent developments might result in an outflow of external funding for Qatari banks over the next few months, depending on how the situation evolves,” said S&P Global Ratings credit analyst Mohammad Damak.

Extending its rating actions further to corporates and insurers S&P has placed ratings of Qatar-based telecommunications company Ooredoo and Doha Bank Assurance Co. on CreditWatch with negative implications.

Leading credit rating agencies such as Moody’s and Fitch have expressed concern over the fluid political situation the country is facing and analysts have warned rating action if the crisis persists and or escalates further.

Fitch has placed Qatar on negative credit watch. Citing the possibility of a “sustained” political crisis, the rating agency said it was placing Qatar’s investment grade AA status on credit watch. “While some discussions have taken place to resolve the crisis, it is becoming more likely that the crisis will be sustained and negatively affect Qatar’s economy and its credit metrics,” said Fitch.

The diplomatic tensions have led to a complete travel ban from the Gulf nations, threatening Qatar’s reliance on imports of food and goods. Although Qatar can cope with supply restrictions for some time, Fitch said it would put strain on the government’s resources.

Even before the crisis, Moody’s had downgraded Government of Qatar’s issuer ratings in late May this year to Aa3 from Aa2 and changed the outlook to stable from negative. With the recent developments, Moody’s analysts have warned that the view could change.

“Even though we do not expect disruptions to Qatar’s ability to export oil and gas via sea routes, imports might become costlier and tourism from the region will likely suffer. If the situation persists, it will negatively affect the sovereign’s credit strength, primarily through higher funding costs, the potential crystallisation of contingent liabilities on the government’s balance sheet and a likely drain on foreign exchange reserves,” said Steffen Dyck, Vice-President — Senior Credit Officer of Moody’s.

Qatari banks’ excessive dependent on external funding’s is likely to pose liquidity challenges for many banks if the crisis persists over a long period.

Qatar’s external system-wide debt has risen sharply over the past few years, reaching Qatari riyal (QAR) 454.3 billion (about $125 billion) at April end, 2017, with a significant portion coming from Europe and Asia. On the same date, banks had a net external debt position of QAR182 billion (around $50 billion), representing 23.5 per cent of domestic loans compared with 13.2 per cent at year-end 2015.

The rising global interest rates along with the impact of rift with neighbours could add to the liquidity woes of Qatari banks. Grappling with a rift with its, Qatar’s central bank raised its deposit rate by 25 basis points to 1.5 per cent following the rate hike by the US Federal Reserve.

Factors such as a general decline in the operating environment, loss of business confidence of the non-oil private sector and external exposure of Qatari banks, particularly to the GCC and Mena [Middle East & North Africa] based customers could result in a spike in non-performing assets (NPAs) if the current crisis remains unresolved over a few months or more.

Data suggests Qatari banks have significant credit exposures to entities within GCC and around the Mena region. A financial stability report published by the Central Bank of Qatar in 2015 put the GCC asset exposure of the banking system at 26.9 per cent of total assets and 15.9 per cent elsewhere in Mena.

“Adverse confidence effects on the private sector and tighter liquidity conditions in the banking system could amplify negative spillovers to the nonhydrocarbon sector,” said Garbis Iradian, Chief Economist of Institute of International Finance (IIF) Mena.

 

Timeline

June 5: The UAE, Bahrain, Saudi Arabia, and Egypt cut diplomatic ties with Qatar, accusing Doha of supporting extremism, and giving the countries’ diplomats 48 hours to leave.

June 6: WAM, the UAE state news agency, announces that the country has closed its seaports, as well as its airspace, to all Qatari vessels and airplanes.

June 7: The UAE General Civil Aviation Authority announces it has shut down all Qatar Airways offices in the country, a day after Saudi Arabia revoked the airline’s licence.

June 9: The UAE Central Bank issues instructions for freezing the accounts of designated terrorists and terror organisations linked to Qatar.

June 17:  Bahrain TV plays tapes showing Qatar’s role in 2011 crisis, showing collusion between those close to the Emir and Bahrain opposition group.

 

Economic sectors that feel the heat

Food & Energy: Qatar losing out on food and LNG

 On the morning of June 6, the UAE closed its seaports, as well as its airspace, to all Qatari vessels and aircraft, accusing Doha of supporting extremism.

The same day, both DP World, Dubai’s port operator, and the Port of Fujairah, barred all ships flying Qatari flags from calling on the UAE’s ports.

The ports’ decision to reject Qatari vessels was in line with the UAE government’s move to sever diplomatic ties with Qatar.

The economic impact on Qatar of this closure of seaports is manifold, predominantly affecting the tiny country’s food imports and its liquefied natural gas (LNG) exports.

The vast majority of food imported by sea before the crisis went through Jebel Ali port, in Dubai. Not only local produce from Oman, but food shipments from Europe and Brazil have also had to create new routes that avoid Jebel Ali.

In order to maintain a continuous supply of fresh fruit and vegetables, which have traditionally come from Saudi Arabia, companies have had to air freight produce in, a very expensive method of importing goods.

Without the assistance of the government in subsidising this process, residents of Qatar will see sharp price increases as supply costs are passed on to them by private companies.

There have been reports in the local press of panic buying, with residents of Doha pictured stocking up on water, frozen foods, canned goods and other essential items.

Also affected by the spat is LNG, of which Qatar supplies roughly a third of global consumption. The energy export has made Qatar one of the richest countries in the world.

The closure of the Port of Fujairah to Qatar, one of the most crucial hubs for LNG and oil tankers in the region, may see the cost of shipping LNG from Qatar increase, according to S&P Global Platts, an analysis service.

Any rise in the cost of exports due to supply disruption would damage Qatar’s position as the leading exporter of the gas, with the rift already hurting contract negotiations with Qatar’s key partners in the Far East.

According to Reuters, Japan-based JERA, the world’s largest buyer of LNG, is already using the crisis to push for less rigid contracts with Qatar, and allowing more imports from the US.

If this continues, Qatar will cede ground to other LNG exporters, permanently hurting its position.

 

Aviation: Five UAE-based carriers have suspended all flights

Since the UAE government’s announcement that it would cut diplomatic ties with Qatar earlier this month, five UAE-based carriers have suspended all flights to and from Doha. The suspension came into effect on June 6 and is until further notice.

The move came as the UAE, Saudi Arabia, Bahrain, and Egypt said they would sever diplomatic ties with Qatar amid escalating tensions and accusations that Doha sponsors terrorism.

Commercial carriers such as Emirates, Etihad Airways, flydubai, and Air Arabia, as well as Royal Jet, the private flight service provider, all suspended their flights to and from Qatar.

They also said they would provide customers who had existing bookings with alternative options including a full refund and free rebooking to a nearby destination.

In its statement when the suspension was announced, Emirates said, “Travellers bound for Doha who are boarding their flight from airports around the Emirates network will be advised to make alternative arrangements.

All customers booked on Emirates’ flights to and from Doha will be provided with alternative options, including full refunds on unused tickets and free rebooking to the nearest alternate Emirates destination.”

On top of that, the UAE banned all international flights serving Doha from flying through its airspace. The General Civil Aviation Authority (GCAA) on June 8 said the UAE’s airspace will be closed to any aircraft flying to and from Doha.

This was later updated, however, to say that the ban on using UAE’s airspace only applies to Qatari means of transport.

Meanwhile, the GCAA on June 7 said it has taken a decision to shut all offices of Qatar Airways in the country with immediate effect. Saudi Arabia and Bahrain took similar measures a day earlier, revoking the licenses of Qatar Airways and ordering its offices to close within 48 hours.

Qatar Airways also suspended flights to Saudi Arabia where the carrier flies to nine cities, as well as flights to the UAE, Bahrain, and Egypt.

The suspension is likely to hurt Qatar Airways’ growth plans, with the carrier (formerly) operating a shuttle to Dubai 14 times daily and frequent flights to Riyadh and Cairo.

If the ban continues, the carrier’s revenue could drop by 30 per cent due to lost traffic, the cost of diverting flights, and a drop in bookings and demand, according to estimates from consultancy Frost & Sullivan.

— Sarah Diaa, Staff Reporter; with inputs from Bloomberg

 

Markets: Uncertainty costs Qatari stocks 

Dubai: Investors have shunned Qatari stocks even as traded volumes have tumbled and analysts see a more grinding move to the downside.

The Qatar Stock Exchange index has been witnessing selling pressure, with investors in panic mode after Saudi Arabia and the UAE, among others, severed ties with Qatar. The index lost more than 7 per cent of its value on June 5, the day the announcement was made.

“The bleeding [will] continue as long as uncertainty continues, though the magnitude of drop has significantly reduced. The pressure is being felt. Investors are shying away from the market,” Nadi Bargouti, managing director at Emirates Investment Bank, told Gulf News.

“We are not talking about fundamentals. All those valuations are questionable in the current environment due to lack of visibility. Volumes are drying up. There is lack of interest in the market,” Bargouti said.

Traded volumes have tumbled from over 1 billion Qatari riyals to just 600 million riyals (Dh999 million to Dh599.41 million).

Naeem Aslam, chief market analyst at Think Markets, also agreed.

“There will be more grinding to the downside than panic selling,” said Aslam, chief market analyst, Think Markets.

Qatar, which is also a part of the MSCI Emerging Market Index, has shed nearly 12 per cent since the start of the year, compared to a 3 per cent fall on the Dubai Financial Market General Index.

Dollar peg

Qatar’s 5-year credit default swaps or the cost of insuring risk fell to 90 basis points (bps) compared to 109 bps last week on June 9.

“Its still elevated compared to previous levels, showing panic,” said Bargouti. The 5-year CDS was at 60-70 levels between March and the end of May.

The Qatari riyal’s 12-month forward rate was at 4.60 against the dollar, compared to an all-time high of 5.88 last week. Spot Qatari riyals stood at 3.67 against the dollar.

“The pressure will remain on the Qatari peg. It will depend on the geopolitical situation,” Aslam said.

- Siddesh Suresh Mayenkar, Senior Reporters

 

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