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Qatari Financial Pain From Sanctions Not Severe… Yet

By Mark Melin. Originally published at ValueWalk.

The initial move by the Gulf Cooperation Council (GCC) to cut ties with Qatar is unprecedented, a Moody’s report noted, echoing bank research on the topic. The Moody’s report on Qatari sanctions points to modeling where initially pressure won’t much be felt, but that eventually changes if a compromise is not found.

As the Qatari government is confronted with a list of terrorists it is alleged to support, and Turkey has pledged troops are on the way to support Qatar, Arab powers in the region have drawn up a “Qatari blacklist,” Reuters reports, which includes the leader of the Muslim Brotherhood, Yusuf Qaradawi. Amid such loud saber rattling, Moody’s looks clearly at the near term and medium term financial implications and keeps its Aa3 credit rating consistent… for now.


Clker-Free-Vector-Images / Pixabay

Initial Qatari sanctions not expected to hurt, but given time they could escalate

A major test of US diplomacy and Trump administration negotiating skills is at hand, as the US have important allies on both sides of the disagreement.

Qatar and Turkey, where strategically significant US military installations are located, is pitted against long-time US allies and GCC stalwarts Saudi Arabia, UAE, Bahrain as well as non-GCC member Egypt.

In his recent trip to the region, Trump called for an end to support of terror, which was followed by GCC-led actions against Qatar. The GCC group severing diplomatic relationships with Qatar was only but one component. The painful suspension of air, land and sea transportation could crimp the nation’s finances, while a travel ban on Qatari citizens entering GCC nations and Egypt and Qatari nationals being given two weeks to leave highlights the serious nature of the dispute.

Qatar diplomatic crisis qatari sanctions
Qatari sanctions map listed by countries – click on map for further details

“The move to isolate Qatar is unprecedented in the GCC’s history,” Moody’s Frankfurt-based Steffen Dyck wrote. “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.”

From an economic standpoint, this could be just the start. The problems for Qatar today are not entirely the problems of tomorrow.

Sanctions
derRenner / Pixabay

If Qatari sanctions compromise is not reached with GCC, longer-term damage could be done

The longer the diplomatic rift with its Sunni kwad GCC partners continues, the tighter the noose around the Shia nation’s economic viability is drawn. Should the issue be drawn out beyond expected norms, there would be a variable level of damage to the Qatar economy, but that likely won’t come in the form of a restriction on exports.

Despite a ban on shipping, Qatar can continue to conduct business. Hydrocarbons are the nation’s biggest export, and Qatari gas tankers can use Iranian and Omani waters to skirt the regional sanctions to keep revenue flowing into the nation. Recently halted exports to GCC nations are relatively small, with only 5% of Qatari gas heading to the UAE, for instance.

Such diversity of revenue streams is expected to limit damage to the nation’s foreign exchange flows, at least initially. If the dispute escalates, there could be a more meaningful fallout.

The escalation of last resort is of a military nature, which could throw the region into wider chaos and leave lasting scars.

The next step, if current pressure proves inefficient, is more of the same but delivered in a more effective package. Remaining in the GCC sanction tool toolkit are more potent restrictions on capital flows, a move that would be negative for the growing Qatari financial sector, particularly the banks, as Moody’s notes:

Tighter domestic liquidity in 2016 drove banks to increase foreign funding, which correspondingly drove the increase in Qatar’s total external debt to about 150% of GDP in 2016, according to our estimates, up from around 111% in 2015. In a scenario of a rapid loss of confidence from international investors and depositors from other GCC countries, the government might have to step in to support domestic banks. In such a scenario, Qatar’s government debt burden would likely rise beyond our current baseline projections of around 48% of GDP in 2017 and debt affordability metrics would weaken. Although Qatar has reasonably strong financial buffers – we estimate that total assets managed by the Qatar Investment Authority were almost 200% of GDP in 2016 – not all of these assets are liquid and external. Therefore, a pick-up in foreign investment outflows would drain foreign-exchange reserves from their current level of $34.8 billion and weaken Qatar’s external liquidity position.

Qatari
bluedge / Pixabay

The issue of the day, in a world of falling hydrocarbon prices, is Qatar’s balance sheet. If the small but wealthy nation continues its rebellious behavior and Qatari sanctions are not resolved, Moody’s thinks it could “negatively affect the sovereign’s credit strength, primarily through higher funding costs, the potential crystallization of contingent liabilities on the government’s balance sheet and a likely drain on foreign exchange reserves.”

In other words, if the Qatar trend towards supporting terror persists, their financial outlook could change, with a ratings downgrade a possibility.

However, ratings downgrade is the least of the areas of concern right now. With Turkey and Iran backing Qatar and the gulf states (for the most part) with many other nations including Egypt backing Saudi Arabia there is fear of a possible war. To add to the mess, there are currently around 10,000 American Troops in Qatar and more US troops in both Saudi and Turkey. Turkey is also a NATO member, if the country is involved in a war it trigger article 5 in some cases requiring NATO respond. Many have questioned why Turkey under the authoritarian, anti-West regime of Erdogan should still be in NATO. But for now they remain a member of the alliance, and the risk of a wider conflict cannot be ruled out.

The post Qatari Financial Pain From Sanctions Not Severe… Yet appeared first on ValueWalk.

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