Dubai: Qatar is expected to face a prolonged period of low economic growth if the economic sanctions imposed by a group of countries led by its neighbours such as Saudi Arabia, the UAE and Bahrain persist for a long period, according to economists, analysts and rating agencies.

All leading credit rating agencies have changed the rating outlook of Qatar to negative following the imposition of economic and diplomatic sanctions.

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. In its latest update, the rating agency affirmed the negative outlook and has hinted that it could potentially lower the ratings if the economic boycott is tightened and or prolonged.

“The negative outlook reflects our view of the potential consequences of the boycott on Qatar’s economic, fiscal, and external metrics, especially if the boycott is tightened or prolonged, said Benjamin Young, a credit analyst with Standard & Poor’s.

“We could lower our ratings on Qatar if the boycott reduces economic wealth levels to an extent that we no longer assess GDP per capita as a sufficient cushion to offset Qatar’s weak trend growth rate.”

Analysts have warned that Qatar’s sovereign ratings could be lowered if policy predictability were to become more uncertain. In order to support its economy and banking system, the Qatari government has been liquidating and utilising part of its government assets weakening the country’s future fiscal outlook.

Sovereign credit fundamentals

Many analysts now expect the crisis from the sanctions to linger into 2018 as the chances of a mediated settlement has diminished. According to rating agency Moody’s, the likelihood of a prolonged period of uncertainty extending into 2018 has increased, which carries the risk that Qatar’s sovereign credit fundamentals could be negatively affected.

In its last rating review, Moody’s kept Qatar’s rating at Aa3 with negative outlook. The rating agency has noted that depending on the duration and potential further escalation of tensions, the dispute could negatively affect Qatar’s economic and fiscal strength.

“Absent a swift resolution, economic activity will likely be hampered by the measures imposed so far. The termination of direct flights between Qatar and coalition countries will affect services trade in areas like consulting and tourism. This will likely also affect the profitability of corporates, including government-owned or government-related entities such as Qatar Airways,” Steffen Dyck, Senior Credit Officer, Sovereign Risk Group of Moody’s.

Moody’s thinks that a prolonged period of uncertainty will negatively affect business and foreign investor sentiment and could also weigh on the government’s long-term diversification plans to position the country as a hub for air traffic, tourism, medical services, education, and sports through a higher risk perception among foreign investors.

Fiscal metrics

S&P also applied same rationale while maintaining negative outlook. It expects Qatar’s external vulnerabilities to rise and could put pressure on its economic growth and fiscal metrics that could eventually impact credit ratings.

“If our estimate of the government’s liquid assets were to fallsubstantially, we could also lower the ratings,” said S&P’s Young.

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.

“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 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.