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Fitch: Duration of Diplomatic Dispute is Key to Qatar Impact
June 6, 2017 / 10:51 AM / 6 months ago

Fitch: Duration of Diplomatic Dispute is Key to Qatar Impact

(The following statement was released by the rating agency) LONDON, June 06 (Fitch) The decision by several governments, including Saudi Arabia and the UAE, to cut diplomatic and economic ties with Qatar has no immediate impact on Qatar's 'AA'/Stable sovereign rating, Fitch Ratings says. If the dispute persists, the economic and financial implications for Qatar would be more serious, but any potential rating impact would depend on several factors, including Qatar's policy response and the maintenance of broad domestic political stability. The level of damage to the Qatari economy will depend on the duration of the dispute and the scope of measures that affect trade. Fitch assumes that the countries involved will seek to avoid a prolonged standoff with the attendant risks to Qatar's economy and regional stability. Qatar's very large sovereign net foreign asset position should allow it to manage temporary macro-economic disturbances. Qatar's exports of natural gas to the UAE via the Dolphin gas pipeline appear to be unaffected and Qatar could redirect its gas exports along international shipping routes. The wholesale closure of borders and loss of established import routes, if sustained, will see inflation spike, for example because most foodstuffs are imported from or through Saudi Arabia. Large infrastructure projects may be delayed or their costs re-assessed if the supply of construction materials from the UAE is cut off. Prolonged economic isolation would imperil Qatar's efforts to diversify away from hydrocarbons and become a regional services and manufacturing hub. Qatar's tourism, trade and hospitality sectors would suffer from a loss of visitors from the Gulf, who make up almost half of total visitors. Revenues of state-owned Qatar Airways will drop because of lower regional traffic and the need to re-route and cancel flights as a result of airspace closures. A general weakening of economic sentiment could hit the retail and real estate sectors. Domestic demand would suffer from the emigration of nationals from the countries imposing sanctions. Implications for the Qatar government's finances are unclear. Like other sectors of the economy, the government directly or indirectly imports a large part of the goods and services it needs, which could delay a return to fiscal surpluses. The government might also provide financial support to those sectors of the economy that are particularly affected. However, any cut-backs to capital spending would have a positive fiscal impact, and slowing growth in itself would have little revenue impact given the government's low tax base. None of the measures announced so far has specifically targeted Qatar's financial sector. Fitch understands that of the non-resident deposits in Qatar's commercial banks (around 25% of the total), a sizeable portion comes from Gulf Cooperation Council (GCC) countries. If there were a sudden outflow of these deposits, this might require a liquidity injection from the central bank, and it could put further pressure on bank funding costs and lead to a further slowdown of credit growth. We believe that the potential political and economic implications for Qatar, and the desire of other GCC members not to completely alienate Qatar, mean that both sides will work towards a relatively swift resolution. But there is considerable uncertainty given the punitive nature of the actions announced on Monday. Tensions between Qatar and other GCC countries have surfaced in the past. In March 2014, Saudi Arabia, Bahrain and the UAE withdrew their ambassadors in a dispute over Qatar's support for the Muslim Brotherhood, which lasted eight months. As we noted when we affirmed Qatar's 'AA'/Stable sovereign rating last September, sovereign net foreign assets worth over 200% of GDP mean that the sovereign credit profile is highly resilient to external shocks. As the situation evolves, our assessment will focus on effects on the sovereign's external and fiscal deficits. Contact: Krisjanis Krustins Associate Director, Sovereigns +852 2263 9831 Fitch (Hong Kong) Ltd 19/F Man Yee Building 68 Des Voeux Road Central Hong Kong Jan Friederich Senior Director, Sovereigns +852 2263 9910 Mark Brown Senior Analyst, Fitch Wire +44 20 3530 1588 The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at All opinions expressed are those of Fitch Ratings. Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Additional information is available on Related Research Qatar here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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