Dubai: Since the introduction on economic and diplomatic sanctions on Qatar by its fellow Arab states the country’s economic risks have risen significantly, according to leading rating agencies, economists and financial sector analysts.

Cost of funding has increased for the sector with a sharp increase in bond spreads and interbank rates. For example, QNB’s 2018 bond spread has risen a massive 105 basis points (bps) since the fallout underpinned by heightened economic risks. Downgrade by rating agencies had a pronounced impact on funding costs, given Qatar’s heavy reliance on foreign funding. Interbank rates have risen by 40bps during the first week since the embargo, stemming from the uncertainty in the financial relations.

Media reports that the QIA has already pumped in several billions of dollars into the banking system last week as a precautionary measure. QCB has denied such reports and indicates the deposit inflow from QIA as regular deposit transaction.

Qatar’s key economic indicators that stood resilient in 2016 and in the first quarter of 2017 are now looking bleak as the country faces potential further sanctions due to non-compliance to 13 demands presented to them by a coalition of Arab states.

Economists expect the scenario to be more pessimistic if the crisis lasts longer. With the economic sanctions taking its toll on liquidity, Qatar is facing potential funding shortage and high cost of funds that could curtail credit growth leading to lower GDP growth, especially non-oil GDP growth.

According to Institute of International Finance in a more pessimistic scenario which assumes that sanctions remain in place for an extended period and ties deteriorate further, headline growth of Qatar’s economy could decline to 1.2 per cent in 2017 and 2 per cent in 2018, principally due to lower nonhydrocarbon 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,” said Boban Markovic, research analyst at IIF.

Rating agencies and independent analysts see a prolonged crisis as the new reality. “A de-escalation is likely only gradually. Risk of further escalation remains. The large FX mismatch in the Qatari banking sector keeps it vulnerable to an abrupt withdrawal of GCC funding. We estimate $35 billion (20 per cent of GDP) in banking sector capital outflows within one year if the GCC decides to sever financial ties,” said Jean Michel-Saliba, Mena Economist of Bank of America Merrill Lynch.

The current crisis is already exerting some pressure on Qatari exchange rate. The 12 month forward exchange rate is now trading at a 918 forward point premium to spot. This represents a QAR of 3.8075, a 4.6 premium compared to the exchange peg of 3.64 and a 2.4 premium vs. the current spot rate. Liquidity in the Qatari financial markets dried up after the implementation of sanctions, causing the 3-month Qibor [Qatar interbank offered rate] to spike by 44 bps in the period since, widening the spread with US Libor to 106bps, and is almost fully explaining the forward rate premium.

The spot rate, has also moved and is now 2.1 per cent ahead of the official peg, trading at 3.7157/US dollar. QCB has guaranteed all forex transactions in and outside Qatar after reports that some exchange houses and some UK banks have stopped dealing in QAR.