Qatar’s economy hampered by 4 months of diplomatic rift

CAIRO – 5 October 2017: Doha’s economy continues deteriorating as the banking sector, GDP growth, stock market and available assets for investments are hit hard by the Arab Quartet's four-month boycott.

As foreign funds keep declining ahead of 2017's third quarter's financial results, Qatar’s stock index fell to a five-year low Wednesday, bringing total losses since the boycott announcement on June 5, down to approximately 18 percent.

The boycott impacted Qatar’s gross domestic product's (GDP) performance, as overall economic growth upped 0.6 percent in the second quarter (Q2) year-on-year, affected by a 2.7 percent annual contraction in the mining and quarrying sector, and the slowing down of the non-oil sector to 3.9 percent, according to official data.

Arab countries' diplomatic crisis seemed to have come with a benefit to Qatar’s food sector, which picked up in Q2. As Saudi Arabia closed key borders, which were an important source of Doha’s food imports, the Qataris had to increase their food production by 39.8 percent.

Negative forecasts by international institutions

Official numbers that came from the Qatari Ministry of Development Planning and Statistics in September showed that Qatar’s economic growth was already struggling before the June 5 diplomatic rift, due to an international drop in oil and gas prices, which constitutes Qatar's key exports.

But expectations reflect an overall slow economic growth for Qatar in 2017. The country’s GDP growth this year will move at the slowest speed since 1995, a Bloomberg survey published in August showed.

Cutting their forecasts, economists predicted GDP growth to stand at 2.5 percent in 2017, a half percent less than the 3.1 GDP growth expected by economists in June’s survey. As for 2018, GDP growth is seen to record 3.2 percent.

Budget deficit is expected to register 5.1 percent of GDP this year, compared to 4.6 percent in 2016, economists said. Meanwhile, the inflation’s forecast declined to 2.2 percent from 2.5 percent.

Qatar’s credit rating was stabilized by AA-/A-1+ in terms of long and short term foreign and local currency sovereign ratings that were issued by international rating agency S&P Global Ratings in August, but with a negative outlook.

The rating agency said the outlook reflects S&P’s view of the long-term consequences that the boycott will incur on the economic and fiscal abilities.

S&P said the ongoing boycott will lead to slower economic growth and hamper fiscal performance. It also noted that Qatari authorities are utilizing the country's large fiscal assets to limit the impact.

Qatari government’s external finances that keep weakening over the short-term and non-resident deposits are also expected to keep declining, the rating agency added.

The International Monetary Fund (IMF) said in August that Qatar’s crisis will possibly weaken confidence in the Qatari economy and reduce investment and growth.

IMF’s assistant director Mohammed el-Qorachi predicted Qatar’s non-oil growth to decline to 4.6 percent in 2017, from 5.6 percent in 2016, as a result of the fiscal consolidation and trade diversion.

“The initial concern that trade disruptions could impact the implementation of key infrastructure projects has been mitigated by the availability of an inventory of construction materials and of alternative sources of imports,” Qorachi said.

Funding issues cripple Doha

The diplomatic boycott has shaped burdens for the Qatari banking system. Pressure on foreign reserves was witnessed as the Qatari Central Bank noticed in July fund outflows from some non-residents.

Deposits of non-residents in Qatar dropped in 18 banks down to 7.6 percent to QAR 170.6 billion ($47 billion) in June from a month earlier, according to the latest data of the central bank, which still hasn't issued reports on July, August and September.

As a result, Qatar’s net international reserves declined 30 percent in June to $24 billion.

Attempting to deliver positive updates despite the absence of data, governor of the central bank Sheikh Abdullah bin Saud Al-Thani said in early October that Qatar’s government has enough reserves to “support its banks in the face of sanctions.”

In an attempt to offset foreign withdrawals, the Qatari authorities showed support to the banking sector. Public-sector deposits hiked 10.5 percent to QAR 295 billion ($80 billion) in August, compared to QAR 267 billion in July, pushing the increase to QAR 53 billion since June 5.

Qatar is estimated to have used $38 billion to support its ailing economy, which is equivalent to 23 percent of the GDP in the first two months of the boycott, international rating agency Moody’s Investors Service said in September.

"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 GCC as a whole," said Moody's Vice-President Steffen Dyck, highlighting that trade, tourism and the banking sectors were the most affected sectors by the crisis.

Asset sales targeted to support liquidity

In efforts to flush foreign reserves and support liquidity, Qatar Investment Authority (QIA) reduced stakes in Credit Suisse Bank, Rosneft for oil and Tiffany for jewelry in October, according to a Bloomberg report.

The American news outlet expected more sales of assets worth over $320 billion, including shares in multinational mining company Glencore and UK’s Barclays Bank.

“Bankers and lawyers, who usually arrange the QIA acquisitions, are now proposing to sell some assets without waiting or expecting any significant investments for the QIA in the short term,” the report said.

The QIA owns a 17-percent stake in Volkswagen, a 9.75-percent in Rosneft, a 2.13-percent in Shell, a 8.49-percent in Glencore, a 5.97-percent in Barclays Bank, a 6.1-percent in Deutsche Bank and a 5-percent stake in Credit Suisse.

Qatar’s government still believes it could overcome the challenges with the central bank stating that it holds $340 billion in reserves that could help the Gulf country weather the isolation. The world’s LNG largest exporter, Qatar, is still pursuing measures to offset negative impact of the sanctions imposed on it.