Our Opinion: 2017

Qatar : No resolution in sight


Qatar’s diplomatic crisis, that began on 5th June, has entered its fourth month. Despite the blockade, Qatar should be able to muddle through.

The diplomatic crisis that began on 5 June has entered its fourth month with no resolution in sight. Qatar refused to accept the demands from Saudi Arabia and its allies necessary to lift current sanctions, denying any link with terrorism. Meanwhile, full diplomatic relations have been restored with Iran. The country’s isolation by its neighbours seems unlikely to end soon, but the risk of further escalation is fading.

A peaceful resolution likely at some point, as a lengthy crisis would likely weaken all Gulf Cooperation Council (GCC) states. The Saudi attempt to isolate Qatar from the rest of the world has failed so far. Major countries, including the US, are neutral and are urging a diplomatic solution, and others such as Turkey openly support Qatar, whose position as the world’s largest exporter of liquid natural gas gives it diplomatic leeway.

Support for the banking sector weighs on Qatar’s foreign assets and its foreign exchange reserves, which dropped by $10.9bn in June. But the government still has large financial buffers, estimated at $340bn (more than 200% of the country’s GDP). Qatar’s current account position is also projected to improve to a surplus this year from a deficit last year as imports have contracted and oil prices recovered.

The IMF forecasts the central government deficit to decline to 5.9% of GDP this year from 8.8% last. Large public infrastructure investments ahead of the 2022 World Cup are the main source of the deficit.

The price of Qatari bonds cheapened considerably in the early weeks of the GCC crisis. While they have partly recovered, further growth is likely in the medium term. That explains why our strategic partner – UBS – is adding Qatar Bonds to many of its portfolios. Although the crisis is likely to last longer, a peaceful resolution is likely at some point, and the probability of major escalation diminishes over time. That may reduce non-resident deposit outflows. The Qatar economy is also adjusting quickly to the diplomatic crisis, and the government’s strong balance is a key risk-mitigating factor.

Prolonged outflows from the banking system could erode the government’s balance sheet and put pressure on the currency’s peg to the US Dollar. All with an interest in the region should closely monitor mediation talks and statements from government officials. This being the Gulf… changes in sentiment can occur quickly and have far-reaching effects.


14th September 2017