One month into the diplomatic spat between Qatar and a Saudi-led bloc of four Arab countries, ratings agency Moody’s has lowered its outlook on Qatar’s economy to negative.

This comes just as the country might face further sanctions over allegations of links to terrorism: foreign ministers from Saudi Arabia, the UAE, Egypt and Bahrain are due to meet today to discuss Qatar.

“The likelihood of a prolonged period of uncertainty extending into 2018 has increased and a quick resolution of the dispute is unlikely over the next few months, which carries the risk that Qatar’s sovereign credit fundamentals could be negatively affected,” Moody’s says.

The diplomatic crisis, which broke out on June 5, saw the four Arab countries cut all ties with Qatar, including closing transport links – actions that stoked concerns about the implications on the country’s commodity trade.

But while the boycott is significant and has been costly for Qatar, experts say it is well equipped to weather the worst economic consequences of the siege.

GTR spoke with two experts about the impact of the crisis so far, and how it could evolve going forward.


How has the crisis impacted trade in the region so far?

With Qatar being highly dependent on regional trade – in particular food imports from Saudi Arabia – the embargo has undoubtedly put the country in a difficult situation, explains Torbjorn Soltvedt, principal analyst for the Middle East and Africa at Verisk Maplecroft. But, he adds, “Qatar is in a really strong position to weather the storm”.

“Qatar is the richest country in the world, measured by GDP per capita, so it can certainly withstand the storm for quite some time. On top of that it has the support of Iran and Turkey, which have managed to break through the siege and alleviate some of the immediate problems,” he says.

Not long after the blockade was imposed last month, videos emerged showing Qatari consumers in panic emptying their local supermarkets, worried that stocks of food and water would run out. Turkey and Iran have since stepped in to provide the imports that once came in by land through Saudi Arabia.

“The boycott is expensive but manageable,” says Florence Eid-Oakden, chief economist at Arabia Monitor. “There was an immediate knock-on effect, but that was short term and the economy adjusted. Qatar is a small country: there aren’t many mouths to feed compared to Saudi Arabia and the UAE, so a few flights of food restocked supermarkets.”

Another issue is that of the Qatari currency. Last week, UK banks, including Barclays, RBS and Lloyds Banking Group, said they had stopped selling and buying Qatari riyal for retailers. A spokesperson for Lloyds Banking Group said that a “third-party supplier” that carries out the bank’s foreign exchange service had ceased trading Qatari riyal as of June 21.

To allay doubts about trade in its currency, the Qatari central bank has since insisted the spat poses no threat to its long-standing currency peg against the dollar.

“Qatari riyal’s exchange rate is absolutely stable against the US dollar, and its exchange ability inside and outside Qatar is guaranteed at any time at the official price,” the bank responded.

“There is pressure on the currency,” explains Eid-Oakden. But, she adds, Qatar’s reserves can defend the currency, even if pressure rises further. “So far, it has not been difficult to alleviate in the sense that the Qatari central bank has ample reserves and other pockets of sovereign savings to defend the currency, including if some London banks stop trading the riyal. It’s a drop in the bucket: I doubt that all international banks would do the same.”

Most importantly, the crisis has so far not hit energy exports from Qatar, the world’s top seller of liquefied natural gas (LNG). “The big question that everyone has has to do with LNG and gas. So far, it looks like on all sides that there is an understanding to keep the issue of LNG and gas off the table and to not disrupt that,” Soltvedt says.

The state-run Qatar Petroleum has continually reassured its customers that it has not been affected by the dispute, and has said it does not plan to cut the pipeline that delivers gas to the UAE. In fact, it announced on Tuesday it plans to boost production of LNG by 30% by 2024.

“I think that’s very much Qatar showing strength and that it is not backing down,” Soltvedt adds.


What will happen if the crisis is pro-longed?

Although it is unclear how the conflict will evolve, Eid-Oakden points to a number of repercussions for the entire region should the spat continue.

She says one “unfortunate impact” is that it will drive Qatar closer to Iran and Turkey – exactly the opposite of what the Saudis want. “If Qatar is given no choice but to use Iranian airspace, which it is now doing, and to import food items from Iran, and to rely on Turkish soldiers to boost its defences, it will do so,” she says.

The hampered trade between the sides in the conflict is already starting to have a negative impact on the Saudi-led bloc too, due to losses from business with Qatar. This includes a range of construction projects as Qatar prepares to host the FIFA world cup in 2022.

“A lot of the companies doing these construction projects in Qatar are based in Dubai,” Eid-Oakden says. “Projects could be cancelled or halted, which would mean they would have to downsize their staff in Dubai, or Saudi Arabia, depending on where these companies are based.”

Another issue that could cause problems for the UAE if the crisis draws out is the reputation of Jebel Ali port, she explains: “There are quite a lot of goods that go through Jebel Ali port, with the ultimate destination being Qatar. Jebel Ali has spent decades building a reputation of being a reliable port. If it now has to break contracts in order to stop the flow of goods to Qatar as a final destination, that would mean less business for the port, and would tarnish the reputation of the port as a reliable entity to deal with for international companies conducting trade in the region.”

Soltvedt at Verisk Maplecroft also emphasises that the crisis could come at a cost for Turkey, as the country’s siding with Qatar could impact ties with the Gulf. “Clearly Turkey has provided some support to Qatar, which could threaten some of its relations with Saudi Arabia and the UAE. It could to some extend hamper trade between Turkey and some of the other big GCC states,” he says.


When will this be resolved, and what should businesses do?

The past few days have seen a flurry of diplomatic activity as Qatar faced a deadline on Tuesday to respond to 13 demands issued by the Saudi Arabia-led bloc. These include closing Al Jazeera, curbing relations with Iran and shutting down a Turkish military base.

While Saudi Arabia has called the demands non-negotiable, Qatar has deemed them as unreasonable, saying the list “was meant to be rejected”. On Monday, Qatari foreign minister Mohammed bin Abdulrahman Al Thani submitted the country’s response, details of which have not emerged, to Kuwait, which is mediating between the parties.

As this article was published on the morning of July 5, foreign ministers of Bahrain, Egypt, Saudi Arabia and the UAE were scheduled to meet in Cairo to discuss further actions. “They will be bridging the differences,” Eid-Oakden says, but adds that it will take more time to reach a final solution. “The best case scenario is that we see the beginning of dialog. We won’t see any decisive decisions made. Nor will we necessarily see any immediate escalation of sanctions.”

Soltvedt has a more pessimistic view on the outcome of the meeting: “Saudi Arabia, the UAE, Egypt and Bahrain will probably be forced to try to increase the pressure on Qatar. But in terms of what they can do, the options are pretty limited. We expect an expansion of what has already been going on, perhaps trying to expand some of the economic sanctions, targeting further businesses with links to Qatar,” he says, adding that while there have been talks about expelling Qatar from the GCC, this is an unlikely scenario.

“Another thing we might see is Saudi Arabia trying to potentially force foreign countries and companies to pick sides, so say ‘if you want to do business in Qatar, you can’t do business in Saudi Arabia, UAE, Bahrain or Egypt’,” he says.

The question remains how long the crisis will last. “We are probably talking weeks at the very least; perhaps even months. We would be quite surprised if there was any resolution this week or next,” Soltvedt says.

Eid-Oakden is hopeful that a solution to the conflict will be found within the first 12 weeks of its outbreak. “If it’s resolved within 12 weeks, I think we can consider that the worst of it is safely behind us. If it extends beyond 12 weeks, we have a problem over the medium term.”

Her advice to businesses is: “Don’t change business strategy for the time being. Hedge where feasible, but expect a solution. This is not a major problem in the larger scheme of things. The international community would like to see it resolved.”