* Qatar showing it can keep imports flowing, banks operating
* Economy may face higher costs, delays
* But unlikely to stop functioning in any fundamental way
* Credit default swaps fall, stock market stabilises
* Finance minister says asset sales not on the cards
By Andrew Torchia and John Davison
DUBAI/DOHA, June 12 Qatar's financial markets
stabilised on Monday after a week of losses as the government
showed it had ways to keep the economy running in the face of
sanctions by other Gulf states.
Saudi Arabia, the United Arab Emirates, Bahrain and Egypt
cut diplomatic and transport ties a week ago, accusing Doha of
backing terrorism. This has disrupted imports of food and other
materials and caused many foreign banks to scale back business
But on Monday, it was becoming clear that Qatar could
prevent the economic damage from becoming critical. Some of its
food factories are working extra shifts to process imports from
nations outside the Gulf, such as Brazil, and shipping lines are
operating via Oman instead of the UAE.
These measures may be inconvenient, involve delays and raise
costs for Qatar; on Monday Fitch put Qatar's AA credit rating on
Rating Watch Negative, saying a sustained crisis could hurt its
credit outlook. But they are unlikely to prevent the economy
from functioning in any fundamental way.
In the local money market, where Qatari banks have often
depended on loans and deposits from foreign banks, local
institutions made up liquidity shortfalls by borrowing from the
central bank's repo facility, bankers said.
In an interview with CNBC television, one of the first
public appearances by a Qatari economic policy maker since the
crisis erupted, Qatari finance minister Ali Sherif al-Emadi
He said the energy sector and economy of the world's top
liquefied natural gas exporter were essentially operating as
normal and that there had not been a serious impact on supplies
of food or other goods.
Qatar can import goods from Turkey, the Far East or Europe
and will respond to the crisis by diversifying its economy even
more, he told CNBC.
"Our reserves and investment funds are more than 250 percent
of gross domestic product, so I don't think there is any reason
that people need to be concerned about what's happening or any
speculation on the Qatari riyal."
In the Gulf's tense political climate, many independent
analysts in the region decline to discuss Qatar's economy
publicly for fear of irritating their governments.
But Jason Tuvey, Middle East economist at London-based
Capital Economics, said that as long as the other Gulf countries
did not interfere with Qatar's LNG exports, which would be a
major escalation of the crisis, the tiny state would probably be
able to carry on without a serious recession.
"It seems Qatar would be able to weather quite a prolonged
period of sanctions," he said, adding that economic growth,
fuelled by government spending and infrastructure projects, was
"highly unlikely to grind to halt".
Qatar's riyal currency, pegged at 3.64 to the U.S. dollar,
was under pressure last week as banks reacted nervously to the
diplomatic rift. On Monday, the currency came off last week's
lows in the spot and offshore forwards markets.
Bankers said the central bank, which has $34.5 billion of
net foreign reserves, backed by an estimated hundreds of
billions of dollars of assets in Doha's sovereign wealth fund,
was supplying enough dollars to the spot market to keep exchange
rates under control.
The cost of insuring Qatar's sovereign debt against default
fell back for the first time in a week, while
yields on Doha's international bonds dropped
almost 10 basis points and the stock market stabilised
after sliding 8.7 percent in the past week.
One result of the sanctions has been a severe shortage of
U.S. dollar cash at Qatar's money changers; supplies used to be
flown in from the UAE but that route is closed. The shortage
persisted on Monday although some dealers said efforts were
underway to obtain supplies from elsewhere, such as Hong Kong.
Tuvey said the main threat to the economy was that Qatari
banks could find it much harder to obtain wholesale funding from
other banks to sustain growth in their loan portfolios. This
could force them to call in loans, hurting the economy.
However, if the situation becomes critical, the Qatari
government can liquidate some of its overseas assets and provide
the funds to its banking system, much as Saudi Arabia did last
year when its banks faced a funding squeeze due to low oil
prices, he said.
Qatar's sovereign wealth fund has major stakes in top
Western companies such as Credit Suisse. Asked by CNBC
whether it might now sell some of these stakes to raise money,
Emadi indicated this was not on the cards at present.
"We are extremely comfortable with our positions, our
investments and liquidity in our systems," he said.
(Additional reporting by Hadeel Al Sayegh in Dubai; Editing by