Qatar In Crisis: A Guide To Markets, Sanctions, And Why A 20% Devaluation May Be In The Cards

In a week that was supposed to dominated by James Comey, Mario Draghi, and the UK elections, Qatar has so far stolen the spotlight.

If you’ve been living in a cave for the past three days, Qatar is under diplomatic siege after long-simmering regional tensions finally came to a head after controversial remarks attributed to Qatari emir Sheikh Tamim bin Hamad Al Thani showed up on Qatar News Agency.

The comments, purportedly delivered at a military graduation ceremony, suggested Doha was prepared to adopt an even more conciliatory stance toward Iran and Hezbollah at a time when Riyadh is for all intents and purposes trying to take advantage of Donald Trump’s ignorance about Mideast affairs to help marshal support for a renewed crackdown on Tehran.

There’s also an amusing backstory about a kidnapped falconry party and a $700 million ransom payment that may have contributed to what’s turned into a veritable fiasco for Qatar.

As for the “rogue” comments attributed to Al Thani, Qatar says they were fake news, planted by hackers who the FBI claims may have been Russian.

Whatever the case, the fallout was swift. Stocks in Qatar plunged 10% in the days that followed the initial move by Saudi Arabia and others to cut diplomatic ties with Doha (they rebounded today), pressure mounted on the riyal, and the market began to bet the peg would break as riyal 12–month forward pts climbed.

“The fact that the current pressure is political and triggered by fellow GCC members is alarming” Chris Turner, London-based global head of strategy at ING, said on Thursday with regard to the riyal. “If officials aren’t able to maintain riyal’s peg to the dollar, QAR may be devalued by at least 20%, although such scenario isn’t expected because government has resources to continue defense of the currency including more than $30b of reserves and sovereign wealth fund assets of at least $250b,” he added.

Meanwhile, the S&P downgrade didn’t help and today, the three-month Qatar Interbank Offered Rate jumped 19bps to 2.164%, the highest since at least August 2010. The CDS market is reflecting the stress:

Moody’s has now weighed in as well. “Qatar’s credit strength will be hurt if tensions with fellow Gulf Cooperation Council countries persist,” Moody’s analysts Steffen Dyck and Malgorzata Glowacka said in a report. “A pick-up in foreign investment outflows would drain forex reserves and weaken Qatar’s external liquidity position, Qatar’s government debt burden would likely rise beyond current baseline projections of ~48% of GDP in 2017, and debt affordability metrics would weaken,” Dyck and Glowacka added, before noting that they “expect Qatari banks’ funding costs to likely rise for debt securities and the risk of withdrawals from non- resident deposits has risen.”

Here’s Goldman on Qatari banks:

Qatari banks remain reliant on external funding including deposits from the rest of the GCC. Lack of access to funding from the GCC and/or redemptions is a risk especially given the tight domestic liquidity situation in Qatar. As of April, the loan-to-deposit ratio in the sector was 112%, with the domestic L/D ratio above 130%. Indeed non-resident deposits constitute c.25% of total deposits. Among the banks we cover, QIB has the highest funding exposure to other GCC states, while QNB has the highest total international exposure.

So that’s the financial side of things.

Of course a lot of that stems directly from a series of sanctions imposed by the Saudi-led coalition.

For those interested in a convenient, bullet point guide to those sanctions, you can find it below.

Via Bloomberg

• DIPLOMATIC TIES, CITIZENS’ MOVEMENTS:
  • Saudi Arabia, U.A.E., Bahrain cut ties with Qatar June 5, giving Qatari citizens 14 days to leave their nations, banned future visits
  • Egypt also severed relations June 5, but with multitude of Egyptians living in Qatar, didn’t impose similar movement restrictions
• VISA ON ARRIVAL:
  • U.A.E.-owned Etihad and Emirates airlines said expats residing in Qatar and possessing Qatari residency won’t be allowed Emirati visas on arrival
• SEA, AIR AND LAND TRAVEL:
  • Saudi, U.A.E., Egypt and Bahrain banned sea and air travel to and from Qatar
  • Qatar’s only land border, with Saudi Arabia, also shut, hurting imports of food
• AIRSPACE:
  • The 4 allies said Qatari carriers can’t fly over their territories
  • Saudi Arabia and Egypt have said foreign airlines may also have to seek permission for overflights to/from Qatar
  • U.A.E. closed airspace to all traffic to/from Qatar
• PORT ACCESS:
  • Saudi Arabia and Bahrain closed their berths to all Qatari-owned ships or vessels flying the Qatari flag
  • Saudi Ports Authority doesn’t specify if must also ban all ships, regardless of flag, going to or from Qatar, and Saudi ports are not applying the rules uniformly
  • King Abdullah Port on Saudi’s Red Sea coast is banning any vessels that are sailing to or from Qatar, which is a more extensive restriction than at some other Saudi ports, according to shipping agent with knowledge of situation
  • U.A.E.’s Abu Dhabi Petroleum Ports Authority late Wednesday expanded its ban to include “all vessels arriving from, or destined to Qatar, regardless of its flag”. Same restrictions were imposed at Fujairah
  • Egypt also banned Qatari ships from its ports, but they can still access the Suez Canal
• OIL AND GAS EXPORTS:
  • Qatar’s oil and LNG exports continue. Common practice of co-loading ships with crude from various Gulf nations may need to cease if port restrictions enforced vigorously
  • NOTE: Tanker loaded Saudi crude after taking Qatar oil cargo: tracking
• BANKING ACCESS:
  • Some banks in Saudi, U.A.E., Bahrain are cutting exposure to Qatar, according to people familiar with the matter. Some lenders in these countries have started withdrawing deposits from Qatari banks and stopped trading riyals and bonds, fearing imposition of financial sanctions
  • Saudi central bank ordered lenders in the country not to increase exposure to any Qatari clients, people familiar with the matter said
  • Saudi Arabian Monetary Agency also told banks licensed in the country that they should not process any payments denominated in Qatari riyals, the people said
• SUGAR DELIVERIES:
  • Saudi Arabia, U.A.E. stopped exporting white sugar to Qatar but since its consumption is ~100k tons/year, Qatar can source from elsewhere, ADM Investor Services said
• MEDIA ACCESS, FREEDOM OF SPEECH:
  • Saudi Arabia closed down Al Jazeera TV channel in the kingdom
  • U.A.E. will prosecute and punish with fines and jail time people expressing sympathy for Qatar on social media, Al Arabiya reported
  • Last month, Qatari news websites were banned in Saudi Arabia, U.A.E. and Egypt
• LATEST POLITICAL DEVELOPMENTS:
  • Kuwait’s Emir Sheikh Sabah Al-Ahmad Al-Jaber Al- Sabah seen as potential peace broker in regional spat
  • Kuwaiti emir traveled to Qatar and met Qatar’s emir Wednesday evening in effort to resolve crisis, having earlier met with leaders in U.A.E.
  • China’s neutrality on Saudi-Iran feud tested by Qatar crisis
  • Trump offers White House meeting to help Qatar, Gulf allies
  • Earlier in week, Trump backed Saudi-led isolation of Qatar
  • Qatari FM to visit Moscow for talks Saturday: RIA
  • Tehran attackers who struck Wednesday were all Iranians Who joined Islamic State, Al-Alam TV reported
  • Iran says too soon to tell if Saudi behind Tehran attacks: ISNA