Economic isolation will hurt Qatar the most

What patience and diplomacy couldn’t achieve, economic isolation might. The UAE along with Saudi Arabia, Bahrain and Egypt have rightly identified individuals and organisations that are sources of terror funding or have linkages to extremists groups. And now, by ordering local banks in the UAE to stop dealing with them, and to freeze their assets, Arab nations are tackling the challenge head-on. The approach will hit Qatar where it hurts the most. Its banking system could face serious repercussions with a severe liquidity crisis looming. The sector is already stretched by financing demands of the $200-billion football World Cup in 2022. Liquidity pressures could increase further if the government opts for more withdrawal of its deposits with domestic banks to finance the deficits. Banks in Qatar attract a large sum of deposits from non-residents. As confidence in the country slips, investors might look elsewhere rather than risk their money in Qatar or come under suspicion of being related to terror activities. S&P Global has already lowered its rating for Qatar. Reduced regional trade and demand will drag economic growth and corporate profitability of companies. Foreign investment, too, will be hampered. Stock markets are already spiralling downward. The airline industry has taken a beating, too, and risks losing market share it worked so hard to gain. Qatar Airways had grown after positioning itself as a hub airline, connecting Asia and Europe via Doha. Now, that is at stake as the airline is barred from using the airspace of the UAE and Saudi Arabia.

Odds are slim in this game of influence. If Qatar doesn’t change its course, it might just put everything at stake. A nation that could have done well together as a pack with the other GCC countries now risks losing clout. Its economic growth might slip to 1.2 per cent this year, and inflation more than double. A tighter financial environment and perhaps deposit flight, which could raise the cost of funds, will eventually hinder ease of doing business. All this certainly doesn’t bode well for Qatar.