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Situation Update: Qatar – Five Arab countries break ties with Doha

2017-06-06 Protection Group International Ltd Situation Update: Qatar – Five Arab countries break ties with Doha

Background

On 5 June, Egypt, the UAE, Saudi Arabia and Bahrain severed diplomatic ties with Qatar, accusing the country of supporting terrorists, including al-Qaeda and Islamic State, and favouring closer ties with Iran. The crisis was sparked by comments published in Qatar’s state news agency on 23 May that were critical of Qatar’s allies, including Saudi Arabia, that Doha claims were falsely attributed to its ruler. The dispute is the latest development in long-standing tensions between Doha and its neighbours, principally over Qatari foreign policy. In 2014, Saudi Arabia, Bahrain and the UAE temporarily withdrew their ambassadors from Doha for eight months in a dispute over Qatar’s support for Islamist groups, including the Muslim Brotherhood, and coverage of Doha-based broadcaster Al-Jazeera. Qatar has said there was "no legitimate justification" for the recent moves.

The UAE, Bahrain and Saudi Arabia governments have given Qatari diplomats 48 hours and Qatari residents and visitors 14 days to leave their territory "for precautionary security reasons." In Yemen, Qatari troops fighting as part of the Saudi-led coalition have been expelled from the country and both Egypt and the Maldives have also suspended relations with Doha. Libya’s Tobruk-based government, backed by Egypt and the UAE, has also cut ties with Qatar. 

Other countries, including close Saudi allies such as Sudan, may follow Riyadh’s call for “brotherly” countries to suspend ties with Qatar. Within the Gulf Cooperation Council (GCC), Oman is likely to maintain its neutral stance and there has so far been no indication that Kuwait, which maintained relations with Qatar in 2014, will join its allies in severing relations with Doha. 

 

Transport Impact

Saudi Arabia, the UAE, Bahrain and Egypt have cut off air, land and sea links to Qatar with immediate effect, creating major operational obstacles for the aviation and transport sectors. Carriers in Bahrain, Saudi Arabia and the UAE, which had around 40 flights to Doha daily, suspended flights to Qatar. In response, Qatar Airways has halted flights to Saudi Arabia, and could widen this decision to include other countries embroiled in the row.

Saudi Arabia, the UAE, Bahrain, Egypt and Yemen have also closed their airspace to Qatari flights, with Saudi Arabia warning any carrier from a third country wishing to fly over its territory to Qatar would require special authorisation. Without overflights via neighbouring countries, Qatari aircraft would have to fly via Iran, Iraq and Jordan into the Middle East and via Iran and Turkey into the EU. Qatar Airways, which has experienced rapid growth in recent years, is poised to suffer major losses due to flight restrictions and the disruption to regional travel and tourism.

Trade and investment ties between Qatar and its neighbours are modest overall, which will help to mitigate the economic impact of the dispute. According to 2015 data from the World Bank, the UAE and Saudi Arabia, Qatar’s largest trading partners in the GCC, only account for 13.08 percent of its total imports. However, the closure of land and sea borders could have a significant impact on Qatar’s ability to import goods. Qatar imports around 90 percent of its food, especially dairy and poultry products, underscoring the vulnerability of certain sectors to disruption. Saudi Arabia and the UAE accounted for around USD 309 mn of Qatar’s USD 1.05 bn in food imports in 2015, most of which came via the land border with Saudi Arabia, where there have already been reports of long queues of trucks on 5 June. Construction costs could also rise as it becomes more difficult to source imported building supplies amid a major building boom that will see Qatar spend nearly USD 200 bn on infrastructure projects and the 2022 World Cup.

 

Economic Impact 

The Qatari stock market was down more than 7 percent and many stocks, including energy and property, fell by 10 percent, the daily maximum permitted by regulators. Ratings agency Moody, which downgraded Qatar’s debt rating due to uncertainty over the sustainability of its economic model in May, has warned the country’s credit rating could also be hit if trade and capital flows are disrupted. The extent and depth of the impact on the Qatari economy will in part depend on additional measures that may be announced in the coming days.

In Egypt, some banks initially reportedly halted dealings with their Qatari counterparts, and banks in the UAE have requested guidance from the central bank on how to respond to the political developments. Saudi Arabia has also said that it would draw up legal procedures to apply to “friendly countries” and international companies. Officials have yet to provide details about the legal measures, but the statement suggests Riyadh might attempt to pressure foreign companies to choose between investments in Saudi Arabia and Qatar.

Despite the likely and unforeseen negative economic fallout of the dispute, including slower growth in the non-oil sector, the Qatari economy is likely to remain resilient overall. Indeed, should financial institutions respond to the political uncertainty by taking a more cautious approach to the region, borrowing costs across the GCC could rise. Notwithstanding a degree of uncertainty around US foreign policy in the region, the presence of a major US military base in Qatar will see Washington work to prevent the crisis from escalating, with the row coming only weeks after President Donald Trump’s visit to the region in which he hoped to form a unified coalition against Iran.

It remains unclear how long the breach in relations is likely to last, however, should it be sustained, Doha retains a USD 335 bn sovereign wealth fund that will help it to manage the downturn. Additionally, recent investment in land and air ports will facilitate the eventual establishment of alternative trade routes. It is unclear if exports of Qatari gas to the UAE and Egypt would be affected by the dispute, however, Doha is likely to eventually find customers for any unsold supply, shipments that both the Emirates and Cairo might struggle to go without. Although global oil benchmark Brent initially rose to more than USD 50 in response to the news, Qatar is a small producer of oil, and OPEC members have proven capable of cooperation on energy even at times of acrimonious political relations. Thus, the dispute with Qatar is unlikely to have a material or significant impact on global prices or supply, as evidenced by a reversal of earlier gains in oil prices in later trading.

Protection Group International Ltd

Situation Update: Qatar – Five Arab countries break ties with Doha - Protection Group International Ltd
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