Qatar rides the storm
Continuing LNG exports are boosting Qatar's economic resilience in the face of the Saudi-led blockade
Since 5 June, when Saudi Arabia, the United Arab Emirates, Bahrain and Egypt
severed diplomatic relations with Qatar and imposed a land, sea and air blockade against it, the country's economy has had to respond to a major financial shock. Over the first six months of the sanctions, Qatari banks faced $35.4bn in capital outflows and the central bank had to cope with a $21bn drop in foreign exchange reserves. Against this backdrop, and given the general current expectations that a diplomatic solution is still far off, analysts and investors have started to speculate: can Qatar avoid a financial collapse and sustain the currency peg? Will it meet the large capital expenditure commitments associated with the 2022 World Cup? In other words, can the tiny but wealthy and influential emirate withstand the shock for long?
It's understandable that some investors are worried, especially because Qatar's current growth model is credit-intensive and liquidity pressures were in place even before the regional spat. However, overly negative views ignore key elements of Qatar's financial strength and the limits of its effective liabilities.
One important factor underpinning Qatar's economic resilience has been the uninterrupted flow of liquefied natural gas exports and the supply of gas to the UAE via the Dolphin pipeline. Furthermore, Qatar is pressing ahead with plans to
expand production from its offshore North field and increase LNG output from 77m tonnes a year to 100m t/y.
As for the broader economy, the Qatari public sector is estimated to hold at least $331.1bn in net financial assets, or 203% of the country's GDP. Additional sovereign assets include 173bn barrels of oil equivalent in hydrocarbon reserves and a large amount of wealth in the form of non-listed state-owned companies and land, along with unknown private equity and other properties. Moreover, because of strong cohesion within the ruling family and the main tribes, a significant part of the private sector is strongly aligned with the government. It could either use its wealth to support national objectives or simply refrain from calling on or selling central bank and government liabilities.
This sovereign economic dominance is the main reason why the government withstood, with relative ease, what would otherwise have been a major financial hit. Interestingly, Qatar's 10-year bond yields increased by only 60 basis points from the beginning of the blockade until mid-November, a fraction of what would be expected under these circumstances elsewhere. For example, Russia's 10-year bond yields increased by 516 basis points five months after several rounds of international sanctions were imposed in March-July 2014.
After an initial shock in which capital outflows soared, the Qatari government used its sovereign assets and liquidity-management tools to stabilise the situation. From June to November 2017, total government and central bank support to the banking sector totaled $39.2bn. While this figure might seem excessive for such a short period of time, it's important to highlight that it constitutes only a rebalancing in the investment portfolio of the public sector and is related to a severe reduction in the total exposure of Qatari banks to blockading countries. Up until November 2017, total losses of sovereign financial assets amounted to only $8.8bn. Moreover, capital outflows peaked in June ($21.3bn) and shrunk substantially month after month before reverting to a net inflow of $844m in November. This may be explained by the fact that a large amount of the Qatari banks' liabilities to residents of blockading countries were short-term. Most matured, or were swapped or sold in secondary markets.
In the absence of new geopolitical shocks, Qatar has passed the worst in terms of capital flight and deposit outflows. Banks are operating normally and the cost of long-term credit to firms has increased a mere five basis points since the start of the blockade. Capital expenditure commitments and large-scale projects are likely to be secured and delivered, and the fiscal and external positions will be supported over the medium-term by a 30% increase in natural gas production and the decline of total imports as the surge of capital stock and infrastructure expansion naturally wears off.
Global capital markets are open to Qatar and the costs of funding are still very low. Notwithstanding the blockade, economic factors commonly associated with a currency crisis or a devaluation are absent in Qatar. The country runs structurally (multi-year terms) large fiscal and current account surpluses and is able and willing to sustain the dollar peg with external revenues and financial buffers.
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