DUBAI, June 7 (Reuters) - Standard & Poor's downgraded Qatar's debt on Wednesday as the country's riyal currency fell to an 11-year low amid signs that portfolio investment funds were flowing out because of Doha's diplomatic rift with other Gulf Arab states.
S&P cut its long-term rating of Qatar by one notch to AA- from AA and put the rating on CreditWatch with negative implications, meaning there was a significant chance of a further downgrade.
The rating agency said Qatar's economy could suffer severely from the decision on Monday of Saudi Arabia, the United Arab Emirates, Egypt and Bahrain to cut diplomatic and transport ties with Doha. They accused it of supporting terrorism, a charge Qatar denies.
"We expect that economic growth will slow, not just through reduced regional trade, but as corporate profitability is damaged because regional demand is cut off, investment is hampered, and investment confidence wanes," S&P said.
Another major rating agency, Moody's, assesses Qatar at Aa3, which is equal to S&P's new rating. Fitch Ratings puts Qatar at AA.
The U.S. dollar was bid as high as 3.6526 riyals in the spot market on Wednesday, its highest level since July 2005, according to Thomson Reuters data. The riyal is pegged at 3.64 to the dollar by the central bank, which only allows small fluctuations around this level.
Qatar's stock index has tumbled 9.7 percent over the past three days, with high trading volumes suggesting some Gulf and international investors are bailing out of the market. (Reporting by Andrew Torchia, editing by Larry King)