“This Time Is More Serious”: One Bank Weighs In On Qatar

If you need to get caught up on today’s biggest story, we would encourage you to check out our rundown here:

To be sure, the reactions will be coming in fast and furious all day, both from analysts and political commentators. Who knows, we might even hear from an expert or two if we listen closely.

In any event, here’s Citi’s quick take in which the bank explains why this time could be “more serious” than the 2014 incident that stemmed from Doha’s support of the Muslim Brotherhood.

Via Citi

It is not clear what is required of Qatar for these sanctions to be lifted, and it is therefore difficult to estimate how long they will remain in place.

In 2014, it took eight months to resolve the row. On the one hand, the severity and extent of the sanctions this time round may argue for a quicker resolution as Qatar will be particularly incentivized to resolve any differences with its neighbours as soon as possible. On the other hand, one may equally draw the conclusion that the position of Qatar’s gulf neighbours has hardened relative to 2014, and that Qatar would need to do a lot more to satisfy them. This may include addressing the issue of Al Jazeera, the Qatari international news platform that has been a perennial source of irritation to Qatar’s neighbours (and the United States) since its inception in the late nineties. This would argue for a more prolonged crisis, in our view. We do not have a strong view at this point regarding timing/duration.

While we think the near term impact of the crisis is easily containable by Qatar, which has substantial resources it can employ, we see considerable risks regarding the economic and financial impact of these sanctions the longer they remain in place

Potential long-term impacts of the latest development could include:

  • A rise in food prices/inflation – a significant portion of Qatar’s food supply comes overland via Saudi: switching to air and sea routes would raise costs;
  • A fall in economic growth – the construction sector is a key driver of the Qatari economy and is partially dependent on overland routes for supplies;
  • Risks to viability of World Cup – if sanctions are not resolved in short order, World Cup construction could be impacted, and plans for fans to base themselves in neighbouring countries during the competition might also be affected.
  • Impact on Qatar Airways – loss of routes and requirement to detour neighbours’ airspace could have a long-term impact on Qatar Airways business;
  • An erosion of fiscal balances/increase financing requirement – any increase in transport costs or losses to Qatar Airways may be absorbed by the government, resulting in a rise in borrowing requirements by the sovereign;
  • A rise in cost of borrowing – we note that liquidity in Qatar’s banking sector has been severely impacted by falling oil prices, and that financial conditions have tightened and foreign liabilities in the banking sector have ballooned (currently USD105bn – compared with USD34bn net FX reserves). We believe that prolonged sanctions would exacerbate this and potentially make financing of external liabilities more costly/difficult.

From a strategy perspective, we believe it is too early to take an outright negative stance as there are so many uncertainties, particularly with respect to the likely duration of the sanctions. The markets are now repricing the curve, on the back of the obvious uncertainty around the financial/economic repercussion on the sovereign credit. On a z-spread basis, Qatar spreads have now caught up with the single-A Middle East average spread (around 120-130bp). Qatari economic policy making is usually interventionist, and attention is paid to $ spreads.

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