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. Tt 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 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.”