Fitch has placed Qatar’s currency issuer default rating (IDR) under review, as the Middle Eastern state – and prominent commercial hub – experiences a political rift with some of its regional neighbours.
According to the rating agency, the decision to put Qatar’s ‘AA’-grade IDR on ‘rating watch negative’ – meaning continuous appraisal in anticipation of a likely downgrade – reflects the joint move of several states to sever their diplomatic ties with the nation.
After alleging in early June that Qatar is supporting extremism, Saudi Arabia, Yemen, Bahrain, Libya, Egypt and the United Arab Emirates all turned their backs on the country and recalled their political officials.
Fitch pointed out: “The countries involved have so far only imposed limited restrictions on financial flows and exposures to Qatar.
“An outright ban on financial relations with Qatar could lead to disruptions in the Qatari financial industry – but the authorities have the financial resources, in the form of central bank reserves as well as Qatar Investment Authority assets, to contain these strains.”
However, the rating agency noted, “if the imposed isolation lasts for a longer period, the implications for Qatar's business environment and economic model would become more serious. Qatar’s drive for diversification has focused on establishing the country as a regional hub and a destination particularly for tourists from the region.
“Prolonged isolation could undermine the business model of Qatari companies, including state-owned enterprises, potentially requiring costly bailouts. The isolation could also adversely affect the public finances.”
One major area of contention behind the crisis is Qatar’s cordial relationship with Iran, with which it co-owns the South Pars/North Dome Gas-Condensate field – the largest reserve of its kind in the world.
In April, Qatar announced that it would resume development of the field in partnership with Iran, ending a self-imposed, 12-year freeze on such activities.
The move raised concerns within the Gulf Cooperation Council that Qatar’s stance on Iran was striking out in a far too independent direction.
Fitch warned: “The risk of further logistical and financial restrictions [on Qatar] is increasing, and the risk of the use of military force – while still remote – can no longer be entirely excluded.
“Domestically, the isolation could lead to strains between those advocating reconciliation with Saudi Arabia and those supporting the highly independent position that Qatar has pursued so far, bringing political stability into question.”
Explaining its rating review, Fitch hinted that, in the long run, Qatar’s gas reliance could do it more harm than good. “The ‘AA’ rating,” it said, “reflects Qatar’s large sovereign assets (sufficient to finance more than 20 years of present budget deficits), along with the country’s fiscal-adjustment efforts, a large hydrocarbon endowment and one of the world's highest GDP per capita ratios.
“Qatar’s hydrocarbon dependence is a key rating weakness, with oil and gas extraction averaging 50% of GDP and 80% of external receipts and government revenue.”
It added: “Other weaknesses include a government debt level above those of rated peers, and mediocre scores on the World Bank’s measures of governance and the business environment (both below the 70th percentile).”