Qatar Economic Rating Risks Being Downgraded: S&P

By Frank Kane

Qatar’s economic prospects have been termed “negative” by one of the world’s leading investment organizations, and the Gulf state could see its rating downgraded in light of the sanctions imposed by the Anti-Terror Quartet.

S&P Global Ratings, one of the “big three” US credit-ratings agencies, said that the outlook for the country’s economic and financial system “primarily reflects our view of the geopolitical risks and potential consequences of the ongoing diplomatic tensions for Qatar’s economic, fiscal, and external metrics, especially if the boycott is tightened or prolonged.”

Qatar’s economy could further deteriorate if the boycott — led by Saudi Arabia, the UAE, Bahrain and Egypt — is intensified, S&P said in a report issued on Saturday.

“We could lower the ratings if the boycott ultimately has a more severe impact than we currently anticipate, leading, for example, to significant capital outflows or pressures on the hydrocarbon sector. The ratings could also come under pressure if Qatar’s fiscal or external performance turned out weaker than our current forecast.

“Should the boycott drag on, and the Qatari public sector continues to draw on its external assets to support the economy, we could reassess our current estimation of the government’s liquid assets. We could consider a downgrade if we believe the Qatari authorities’ fiscal cushion to absorb additional shocks has reduced,” S&P added.

Since the quartet of Arab countries, later joined by Libya and Yemen, introduced measures against Qatar over its funding of terrorist organizations, its policymakers have been spending huge sums to compensate for lost trade, tourism and transport links with its neighbors.

The situation could deteriorate further if the anti-terror alliance increased financial pressure by closing or appropriating Qatar’s financial assets across the region, which have so far been left largely untouched.

“The Qatari authorities continue to effectively use the country’s large fiscal and external assets to mitigate the impact of an ongoing Saudi-led boycott. Nevertheless, the boycott is expected to continue for an extended period, with no clear resolution in sight,” S&P judged, ranking Qatar’s long- and short-term foreign and local currency sovereign ratings at AA- and A-1+, below prime investment-grade status. In contrast, S&P rates Saudi Arabia and the UAE economic outlooks as “stable.”

Qatar’s rulers have been withdrawing from a range of overseas investments to preserve cash to deal with the crisis. “The government has taken measures to ease the immediate economic and financial effects of the boycott. In particular, it has established new trade routes through other countries in the region, resulting in a recovery in imports,” S&P said.

“The fall in non-resident deposits and inter-bank placements has been offset by liquidity injections by the Qatar Central Bank and repatriation into the domestic banking sector of about $40 billion (24 percent of gross domestic product) of public sector assets mostly owned by the Qatar Investment Authority (QIA), previously held abroad.”

The report also raises questions about the ability of the Qatari political system to withstand a long-term anti-terror campaign.

“In our view, the country’s public institutions are still relatively undeveloped compared with those of most sovereigns we rate in the ‘AA’ category. Executive power remains in the hands of the emir. We see the predictability of future policy responses as being tempered by weak political institutions,” the rater said.

Other economic analysts have also noted the cost to Qatar of continuing to resist Arab demands. Jason Tuvey, Middle East analyst at London-based Capital Economics, said recently that GDP growth had shrunk to 1.4 percent in the first quarter of 2018, down from 3 percent last year, reflecting a slump in hydrocarbon output, with tourism and banking hit especially hard.