Doha’s re­fusal to ac­cede to the de­mands of the quar­tet has sti­fled growth in last 12 months, says

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The diplo­matic cri­sis in the Ara­bian Gulf re­gion that has af­fected Qatar’s econ­omy shows no signs of abat­ing and any es­ca­la­tion in the is­sue be­tween the gas-rich coun­try and the quar­tet of Saudi Ara­bia, the UAE, Bahrain and Egypt means Doha will have to dig deep into its re­serves to sup­port its econ­omy.

“The econ­omy is likely to rely in­creas­ingly on state fund­ing for growth, re­vers­ing a fund­ing model in the past cou­ple of years, where non-res­i­dent [bank] de­posits were the key source of fund­ing,” the in­vest­ment bank EFG-Hermes said in a re­search note.

A fore­cast by BMI Re­search, a unit of Fitch Rat­ings, of an over­sup­ply in the liq­ue­fied nat­u­ral gas mar­ket next year that could force the spot prices of LNG down sig­nif­i­cantly does not bode well for the eco­nomic and fis­cal prospects of Qatar. The coun­try is the world’s big­gest LNG ex­porter and rev­enues from the sale of hy­dro­car­bons ac­count for about 90 per cent of its in­come.

EFG-Hermes es­ti­mates Doha has pumped US$34 bil­lion into the econ­omy – whether in the form of pub­lic sec­tor de­posits or run­ning down for­eign re­serves – in the four months to Septem­ber to re­verse the im­pact of out­flows from non-res­i­dents and the pri­vate sec­tor, af­ter cri­sis.

“In our base-case sce­nario, we ex­pect the state will have to in­ject $45bn in the next two years to fund growth. While not likely to sig­nif­i­cantly af­fect the sov­er­eign’s as­set base, it will weigh on the coun­try’s ex­ter­nal as­set po­si­tion; thereby risk­ing fur­ther sov­er­eign down­grades,” EFG-Hermes said.

Saudi Ara­bia, the UAE, Bahrain and their North African ally Egypt in June sev­ered diplo­matic, trade and travel ties with Doha, over its sup­port for ter­ror­ist groups and at­tempts to un­der­mine their re­gional poli­cies and do­mes­tic af­fairs. Qatar has been un­der­tak­ing a se­ries of mea­sures to shore up its econ­omy, which is suf­fer­ing from the boy­cott that has de­prived it of its only land bor­der cross­ing, key air routes and ac­cess to the Gulf’s main ports. The cri­sis has led credit rat­ing agen­cies to down­grade its sov­er­eign and bank rat­ings and pres­sured its sov­er­eign wealth fund to trans­fer money home.

Rat­ing agency Moody’s In­vestors Ser­vice es­ti­mates Qatar burnt through $38.5bn, or 23 per cent of its GDP, to prop up its econ­omy in the first two months of the eco­nomic em­bargo. Ali Al Emadi, the coun­try’s fi­nance min­is­ter, told the

Fi­nan­cial Times in Oc­to­ber that the Qatar In­vest­ment Au­thor­ity, the coun­try’s sov­er­eign wealth fund, had brought back more than $20bn into the coun­try since the stand-off with its neigh­bours.

QIA, which has an es­ti­mated of $320bn in as­sets, may be sell­ing some of its as­sets to raise funds. The fund has re­duced its di­rect hold­ings in Credit Suisse, Ros­neft and Tif­fany & Co, ac­cord­ing to a Bloomberg re­port. Mr Al Emadi, how­ever, de­nied the re­ports of as­set sales to raise funds in his in­ter­view with the FT.

“We be­lieve the em­bargo will have a neg­a­tive im­pact on Qatar’s eco­nomic and fis­cal prospects the longer it lasts, and is af­fect­ing the pock­et­books of a sig­nif­i­cant num­ber of Qatari busi­ness in­ter­ests,” Citi said in a re­port re­leased in the fourth quar­ter of this year, it said that the dif­fer­ences be­tween the Saudi-led al­liance and Qatar will take years to re­solve and the em­bargo is likely to stay in place over that time.

Al­though the pos­si­bil­ity of an es­ca­la­tion in the diplo­matic row is cur­rently low, Citi econ­o­mists said the pos­si­bil­ity of it de­te­ri­o­rat­ing fur­ther can­not be “al­to­gether dis­re­garded”.

“In our view, the most dan­ger­ous es­ca­la­tion sce­nario from the Qatari point of view would be a widen­ing of the em­bargo to in­clude third par­ties do­ing busi­ness with Qatar.”

The bank es­ti­mates that the Gulf as­sets in Qatar at risk of be­ing pulled out should things get worse amount to around $35bn.

The IMF projects the non-oil econ­omy of Qatar will grow by only 4.6 per cent this year in re­sponse to con­tin­ued iso­la­tion. EFG-Hermes, mean­while, ex­pects the non-oil real GDP growth to de­cel­er­ate to 4 per cent in 2017 and ex­pand only by 4.5 per cent in 2018 from 5.6 per cent ex­pan­sion recorded in 2016.

The weak­ness in tourism is par­tic­u­larly ap­par­ent, as Qatar has lost most of its largest client base – Saudi Ara­bia and the UAE. “Pop­u­la­tion

The econ­omy is prob­a­bly re­vers­ing a fund­ing model in the past cou­ple of years, where non-res­i­dent de­posits were the key source of fund­ing EFG HERMES

num­bers are also a clear in­di­ca­tor of a slow­ing econ­omy, with the pop­u­la­tion growth slow­ing to more than a five-year low to­wards end-2017,” ac­cord­ing to EFG-Hermes.

It added that this de­cel­er­at­ing trend would con­tinue as a num­ber of big projects came to­wards their end, open­ing the door for an in­creas­ing num­ber of for­eign labour­ers to leave.

The coun­try’s stock mar­ket is not do­ing well ei­ther, los­ing more than 20 per cent this year and EFG-Hermes views Qatari eq­ui­ties as a “non-starter” un­til the coun­try re­solves the is­sues with its Arab neigh­bours.

“With Qatar be­ing one of the worst per­form­ing mar­kets of 2017, value has clearly opened up, but we think that a last­ing re­cov­ery in this mar­ket is un­likely un­til the po­lit­i­cal out­look in the Gulf has im­proved.”

Reuters; AFP

Citi es­ti­mates that the Gulf as­sets in Qatar at risk of be­ing pulled out should things get worse amount to around $35bn

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