Fears of escalation push Moody’s to downgrade Qatar

The rating agency Moody's has downgraded Qatar's outlook to negative from stable, because of what it regards as an increased probability that the country's dispute with some of its neighbours will not be solved quickly.

"Public exchanges between the various parties in recent weeks and previous periods of heightened tensions between Qatar and other GCC countries suggest that a quick resolution is unlikely and that the stalemate may continue for some time," the rating agency said.

Moody's said this poses the risk that Qatar's sovereign credit fundamentals could be negatively affected if the spat escalates. For the time being, however, it affirmed its longterm issuer and senior unsecured debt ratings for Qatar at Aa3, among the highest rating agencies give to countries.

The UAE, Saudi Arabia, Bahrain and Egypt on June 5 broke diplomatic ties with Qatar and cut off air, sea and land access to the country over Doha’s support for “terrorist groups aiming to destabilise the region”.

The dispute is the most serious between GCC members since the organisation’s creation in 1981.

And it comes at an inopportune time for Qatar, which is already reeling from low hydrocarbon prices with the latest rift likely to ratchet up the pressure on the country's economy and finances.

“The change in outlook is a reflection of the rise in economic and financial risks fac- ing Qatar since the row with fellow GCC neighbours erupted,” said Dima Jardaneh, an economist at Standard Chartered in Dubai. “It remains to be seen to what extent these risks could materialise, but Qatar’s credit fundamentals have not been impacted by the crisis so far.”

While the discord has not affected the main drivers of Qatar's economy, the crisis has spooked investors, prompting a sell-off of Qatari stocks. Since the spat broke out, the benchmark Doha Security Market index has shed 10 per cent of its value as investors fear that the termination of flights between Qatar and its opponents will dent the profitability of corporations as well as receipts from tourism.

It has also been suggested by some bankers that GCC countries opposing Qatar may yank deposits out of Qatari banks. If that happened, observers including Moody's note that the cost of borrowing for the Arabian Gulf nation would shoot up. The Qatar finance minister Ali Shareef Al Emadi has, however, shrugged off such concerns in recent days, saying that his country's banking system was stable and had ample reserves of cash.

Still, things are not so bad yet as to warrant a downgrade of the country's rating. Moody's said the main reason behind the affirmation of the credit ratings is the fact that the country has adequate fiscal buffers and is still getting revenue from the sale of hydrocarbons. Moody's noted that the central bank had about US$35 billion in international reserves while the Qatar Investment Authority, the country's sovereign wealth fund, has assets of more than $300bn.

"The rating affirmation takes into account a number of credit strengths embedded in Qatar's credit profile, including the sizeable net asset position of the government and exceptionally high levels of wealth," the rating agency said.

In a separate announcement yesterday, Moody’s said it was affirming the ratings of the 10 Qatari banks that it covers, reflecting “the resilience in their financial performance underpinned by continued strong asset quality and capital buffers,” and that