| 13 September, 2017

Economic and fiscal impact of sanctions on Qatar turns acute

Severity of the diplomatic dispute between Gulf countries is unprecedented

Image of Doha skyline used for illustrative purpose.

Image of Doha skyline used for illustrative purpose.

Dubai: More than three months into the sanctions imposed by its neighbours, the economic and fiscal impact on Qatar has been acute, while the ongoing dispute is likely to have some impact on other GCC (Gulf Cooperation Council) countries, according to ratings agency Moody’s.

“The severity of the diplomatic dispute between Gulf countries is unprecedented, which magnifies the uncertainty over the ultimate economic, fiscal and social impact on the GCC as a whole,” said Steffen Dyck, Moody’s vice-president, senior credit officer and co-author of the report. “While we expect the GCC to overcome its divisions, tensions persisting — or even escalating — would be the most credit negative for Qatar and Bahrain.”

The direct impact of the closure of land, sea and air linkages on the Qatari economy has been acute. In the first month of the embargo, Qatar’s imports slumped 40 per cent compared with the same month a year ago.

Qatar heavily depends on supplies from the countries that have imposed sanctions — not only because they are direct neighbours, but because it uses the region’s largest re-export centre, Jebel Ali port in Dubai, as its supply hub. This is particularly true for building materials.

“We estimate that around 70 per cent of construction materials are imported or reimported from Saudi Arabia and the UAE. While exports grew by 5.4 per cent year-on-year in June, that was much weaker than the average 19 per cent year-on-year growth observed since the beginning of the year,” Dyck said.

According to Moody’s, Qatar faces large economic, financial and social costs stemming from related travel and trade restrictions. Qatar’s future credit trajectory will depend heavily on the evolution of the dispute. The negative impact of the dispute has so far been concentrated in the trade, tourism and banking sectors, and increased the country’s financing costs.

Fellow GCC countries previously accounted for around half of Qatar’s visitors. Since the travel restrictions were put in place, the number of visitors from the GCC has dropped by more than 70 per cent, leading to a decline of more than 40 per cent in total tourist arrivals in June 2017 compared with a year ago. While Qatar implemented some amount of import reorientation to circumvent the sanctions, its new import sources such as Iran and Turkey are more distant than Saudi Arabia and the UAE, and do not share land borders with Qatar, implying higher costs.

According to the country’s foreign minister, Qatar is paying 10 times more to import food stuff and medicines than it did before the sanctions. Although the government is covering the additional cost of imports with assets from the sovereign wealth fund, food prices jumped 4.5 per cent year-on-year in July 2017, after declining 1.9 per cent in May.

Capital flight

Moody’s estimates that Qatar has injected almost $40 billion out of a total $340 billion of its financial reserves to support its economy and financial system during the first two months of the standoff. Sizeable capital outflows in the vicinity of $30 billion flowed out of Qatar’s banking system in June and July, with further declines expected as GCC banks opt not to roll over their deposits.

Negative foreign investor sentiment has also pushed up the cost of financing and led to capital outflows. Although long-term financing costs have stabilised, the risk premium on the last five-year dollar bond issuance from June 2016 has risen to around 120 basis points over US Treasury equivalents, from around 100 basis points before the dispute.

According to Moody’s analysts, the immediate impact of the dispute on the economic strength of the Saudi-led coalition is likely to be modest in 2017, given a lack of counter-sanctions by Qatar, and because intra-GCC trade is relatively modest due to the region’s hydrocarbon-focused export structure.

Among Qatar’s GCC critics, Bahrain is most exposed to an escalation of regional tension. Rising debt, increased issuance from other GCC sovereigns and rising US interest rates have put pressure on Bahrain’s financing costs since 2014. To some extent, GCC countries such as Oman and Kuwait are expected to benefit marginally from the diversion of trade along other GCC routes.

However, non-oil trade is small, particularly in Kuwait, where it accounts for less than 10 per cent of total exports (4 per cent of GDP), so any impact on growth is likely to be negligible.

By Babu Das Augustine Banking Editor Gulf News 2017. All rights reserved.