Qatar injects $38bn into economy to counter embargo
Failure of mediation efforts makes prospect of quick resolution unlikely, says Moody’s
Qatar has injected about $38.5bn of its $340bn reserves into its economy to cushion the impact of its neighbours’ embargo, says a Moody’s report.
The credit agency estimates that the equivalent of 23 per cent of gross domestic product was used to support the economy during the first two months of the embargo, launched on June 5.
Doha had to deal with “sizeable capital outflows” of about $30bn during June and July, with further outflows expected as Gulf states choose not to roll over deposits, it said.
Moody’s said Qatar faces large economic, financial and social costs from the travel and trade restrictions imposed by Saudi Arabia, the United Arab Emirates, Bahrain and Egypt, which accuse it of sponsoring extremism.
Qatar, which denies the charges, has been hit hardest in the tourism, trade and financial sectors, and has to deal with rising financing costs, it said.
Steffen Dyck, a senior credit officer and co-author of the report, said “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 Gulf Cooperation Council as a whole.”
The dispute, the most serious in the Gulf in decades, has driven western allies apart and undermined business confidence in an oil-dependent region reeling from the sustained fall in crude prices.
Moody’s said the spat will damage GCC growth initiatives to boost pan-regional trade and infrastructure, and hinder development of capital and financial markets.
The agency, which assigned a negative outlook to Qatar in July, said the failure of Kuwaiti and US mediation efforts indicated there was no quick resolution in sight.
“In the short term, we expect tensions to persist, quite possibly to escalate,” the report said. “The severity of the dispute is unprecedented, which magnifies the uncertainty regarding the ultimate economic, fiscal and social impact on the GCC as a whole.”
Qatar’s trade dropped 40 per cent in the first month of the embargo, exposing the state’s dependence on its neighbours. About 70 per cent of its construction materials come from or through Saudi Arabia and the UAE, Moody’s estimates.
The embargo has forced Qatar to find other trading routes, pushing up costs. Food prices jumped 4.5 per cent year-on-year in July, having declined 1.9 per cent in May.
Tourism has also been badly affected. The number of visitors from the GCC fell more than 70 per cent since the travel restrictions were imposed, leading to a 40 per cent year-on-year drop in total arrivals in June.
Moody’s says long-term financing costs have stabilised, but the risk premium can be seen in June 2016’s five-year bond issuance, which has risen to 120 basis points above US Treasury equivalents, compared with 100bp before the dispute.
In June and July, $15.4bn, or 10 per cent, of non-resident and private deposits left Qatar, as well as $15bn, or 23 per cent, of funding from overseas banks. Qatar’s foreign exchange reserves fell by 30 per cent in June to $24.4bn from $34.8bn in the previous month.
Despite the capital outflows, Moody’s said it does not expect Qatar to raise funds from international capital markets this year, thereby cushioning Doha from the impact of higher funding costs “for the time being”.