While north Africa and the Levant have been beset by revolt and civil war in Syria and Libya in recent years, the Gulf states have remained a haven of relative stability. However, the political isolation of gas-rich Qatar this year has brought uncertainty to oil-wealthy Gulf Cooperation Council nations already suffering economic damage from the crude price collapse three years ago.
In June, Saudi Arabia and the United Arab Emirates led Bahrain and Egypt in closing airports and seaports to Qatar, claiming it fostered terrorism. Doha denies this but is now isolated from the leading GCC powers.
Travel and trade restrictions leave Qatar facing significant costs, with credit rating agency Moody’s saying the its future depends on the outcome of the crisis. “The severity of the diplomatic dispute between Gulf countries is unprecedented, which magnifies the uncertainty over the ultimate economic, fiscal and social impact on the GCC as a whole,” says Steffen Dyck, a senior credit officer at Moody’s.
Bankers are adjusting to a likely protracted dispute, in addition to lower government spending that has constrained growth in the region since oil prices collapsed.
As banks from the four nations began removing term deposits held in Qatar, Doha drew on its vast wealth to sustain its economy. Moody’s says Qatar injected almost $40bn out of reserves of $340bn to support its economy and financial system during the first two months of the dispute.
Before the crisis, overseas customer deposits made up about a quarter of all deposit funding in the banking sector but that has fallen to an estimated 18-19 per cent, according to Fitch, the rating agency. In June and July, there were large net outflows of non-domestic customer deposits of $8bn and of overseas deposits and borrowings of $15bn, according to official data. More outflows of GCC money are expected as deposits mature, Fitch says.
However, in that period the government and public sector have placed deposits in the banking system of about $19bn, while central bank support amounted to $9bn, Fitch says.
“Fundamentally, the outflow of non-domestic money is being replaced by an inflow of domestic money,” says Redmond Ramsdale, a senior director of financial institutions at Fitch Ratings. Fitch says overseas money is starting to return. Central bank statistics show overall funding for the Qatari banking sector rose in August, up 1 per cent on July.
Asian banks have been rolling over deposits, albeit at higher premiums of 25 to 30 basis points. Qatar National Bank closed a $630m Formosa bond issue in Taiwan in September, signalling confidence among many Asian investors. “We are extending our lines of credit to Qatari clients,” says one banker with an Asian institution. “There is good money to be made.”
Most international lenders have continued normal relations with Qatar. “We are a global bank operating across a broad political spectrum, we are not party to any dispute,” says a senior banker with a European lender. “So we will abide by any international sanctions, but beyond that it is business as usual.”
As global finance adjusts to the new geopolitical realities, Qatar will have to pay five to 10 basis points more than before the crisis to raise money on capital markets, says one banker with a US institution. “The credit needs to be reset and the sovereign needs to issue first. But Qatar is a small country, sitting on large reserves . . . so we aren’t concerned.”
Some officials in Abu Dhabi, the UAE capital, have called on international companies to choose between the UAE and Qatar. Bankers say UAE-owned institutions are reluctant to grant mandates to banks with significant Qatari shareholders. And some foreign bankers are worried about losing business in Saudi Arabia and the UAE. “We have to be very careful about being seen to do business with Qatar,” says another Asian banker.
The sense that regional businesses are being forced to take sides is a problem for some bankers in the Dubai International Financial Centre. “No one wins from this situation and we all pay a price . . . there is a regional impact,” says the European banker.
The DIFC, a special economic zone that is a base for more than 21,000 workers and 1,750 companies, positions itself as the regional launch pad for international financiers. The centre grew at 6 per cent in the first half of 2017, despite fears that the cost of doing business in Dubai makes the city less competitive in the tougher trading climate with lower oil prices.
Doha airport, once an hour’s hop from Dubai, is now reached via Oman or Kuwait. This means Qatari clients cannot travel to the UAE to meet financiers and manage portfolios.
Executives fear that Dubai will be hit by the collapse in trade with Qatar, once a main export destination for construction materials. Qatar is in the middle of a $200bn infrastructure investment for the 2022 World Cup.
Qatar’s imports slumped by 40 per cent year on year for June 2017 as the boycott bit. Imports from the UAE fell by two-thirds in the same month, illustrating its importance as an import-export hub for Doha.
Much of this re-export business has moved to Oman, which — like Kuwait — has remained neutral. Imports rebounded in August, showing Qatar’s ability to limit the embargo’s impact by switching supply routes. “The Qatar crisis will not bring Dubai down, but it is natural to expect an impact,” says the European banker.
Officials concede that Dubai cannot disentangle itself from the UAE’s role in the embargo. The UAE central bank ordered lenders in the federation to impose enhanced due diligence measures on six Qatari lenders. The DIFC’s regulator has also told entities operating in the centre to follow these measures, according to a document seen by the FT.
Some DIFC entities have expressed concern about a requirement to detail compliance procedures relating to their dealings with well-known lenders including Qatar National Bank, one of the region’s largest. “I thought we’d signed up to an international financial centre,” says one western banker. “Not one exposed to local politics.”