Previous Quarterly Editions
Expropriation Risk: 38 38 38 39 Political Violence Risk: 35 35 35 36 Terrorism Risk: 5 5 5 5 Exchange Transfer and Trade Sanction Risk: 35 35 35 35 Sovereign Default Risk: 15 15 15 15
TREND ►
In January 2020, Saudi Arabia, the United Arab Emirates (UAE), Bahrain (the Arab ‘quartet’) and Qatar signed a “solidarity and stability” deal, known as the Al-Ula agreement. The deal ended the 43-month boycott of Qatar by the quartet imposed in mid-2017. Since the deal, the quartet has restored trade, travel and diplomatic ties with Qatar, alleviating a major source of political and supply chain risk for the country.
Qatar’s financial power and diversified international alliances allowed it to weather the boycott, including rebalancing trade relationships to re-route many essential imports such as food and medicine. Qatar-Saudi reconciliation has seen the most progress, with both country leaders now holding regular consultations on regional issues.
However, longstanding ideological differences between Qatar and the quartet will complicate implementing the Al-Ula deal, especially given the apparent lack of safeguards to monitor and verify compliance by all signatories. Qatar’s support for the Muslim Brotherhood and its close ties with Turkey are among the thorniest issues.
The boycott’s termination provides Qatar a tailwind to recover from the COVID-19-related recession. Stemming national carrier Qatar Airways’ losses will be one of Qatar’s greatest gains from the Al-Ula deal; the airline had been forced to take longer routes around quartet states’ airspace, increasing fuel costs. The return of Saudi tourists to Qatar (half of all visitors pre-boycott) will boost Qatar’s nascent tourism industry, although probably only adding marginally to gross domestic product (GDP).
The return of connectivity to Dubai, the region’s aviation hub, will be critical ahead of Qatar hosting the November 2022 football World Cup. Positive effects will also be felt in banking, as Saudi clients begin shifting funds back to Qatar, strengthening liquidity in Qatar’s banking system. The boycott’s end will also fuel recovery in Qatar’s trade volumes with Gulf neighbours.
As Qatar seeks new markets for its gas, the easing of tensions may revive plans for additional gas exports to Saudi Arabia and the UAE, both of which face rising energy demands as they develop their manufacturing bases. Other areas to benefit are Qatar’s stock exchange and demand for logistics and consumer goods. Qatar’s property market could also benefit from a higher volume of transactions as the reconciliation improves investor sentiment.
Qatar’s post-boycott economic course will rest on its core strength in liquefied natural gas (LNG). The first phase of the North Field Expansion (NFE) project, which received a final investment decision in February 2021, is likely to be the largest energy project to proceed this year. It is also well timed, as Qatar winds down its World Cup-driven infrastructure programme. The NFE’s positive economic impact will be felt in the second half of 2021, lifting GDP growth to around 2.5% from a contraction of 2.7% in 2020.
On the political front, reflecting its natural gas dominance and the ruling family’s confidence, Qatar has emerged from the boycott as a key mediator on issues ranging from the nascent US-Iran dialogue to peace talks between the Taliban and the Afghanistan government. Recently, Qatar has partnered with Turkey and Russia in a tripartite consultation mechanism, to help shepherd a political solution in Syria.
TREND ▲
Given the bedrock hydrocarbon industry’s prevailing model of joint ventures with oil majors, expropriation risks are minimal. Qatar is also touting its new industrial free zones, co-located with its new sea and airports, as destinations for foreign investment.
As the first phase of the NFE project begins this year, Qatar’s energy minister has indicated that the project would be viable even with oil prices as low as USD20/barrel, owing to Qatar’s low production costs. While Qatar Petroleum (QP) has the finances to proceed with the project alone, it has invited international oil companies (IOCs) to submit tenders to become equity partners in the NFE. QP is set to tap an IOC as an equity partner both to share the upfront cost and to benefit from IOCs’ marketing reach; the latter is crucial as there is fierce competition for end-user-backed LNG contracts amid a natural gas supply glut that is set to take hold by mid-decade.
Qatar’s leader Emir Tamim bin Hamad Al Thani used the Qatar boycott to promote nationalist sentiment, with popular support coalescing around his rule. He has also increased senior royals’ visibility in key government briefs, including foreign minister. These moves have helped consolidate the emir’s domestic power base.
In November 2020, the emir announced that long-promised elections for the legislature (Shura Council) would be in October 2021. With power almost entirely centralised, the Council is effectively a rubber-stamping body; regardless of the elections, the Council will remain loyal. Given neighbouring Kuwait’s persistent policy deadlocks due to its powerful parliament, the appetite for greater political openness in Qatar is very weak.
In early May 2021, Qatar’s powerful finance minister was arrested over allegations of corruption, abuse of power and embezzlement, and was subsequently dismissed from office. This was a highly unusual step as allegations of any criminal conduct by senior officials are typically addressed out of public view; this may be a harbinger for a broader anti-corruption push.
Qatar’s large expatriate population means that its security sector has traditionally focused on internal security, but the sharp downturn in relations with its large and well-armed neighbours has forced it to re-evaluate its military- Qatar’s armed forces are growing exponentially. The United States will continue to be Qatar’s ultimate security guarantor, especially as Qatar contains Al Udeid airbase, US Central Command’s forward headquarters.
Qatar has ruled out a deal to normalise ties with Israel and insists that any deal would be tied to resolving the question of Palestinian statehood. In practice, however, Qatar will continue to be one of Israel’s most important Arab partners as Qatar bankrolls public-sector salaries in the Gaza strip, preventing the enclave from descending into instability that could spill over into Israel.
Qatar has no terrorism and negligible organised crime. Well-paid security personnel and stringent border controls make successful attacks unlikely. Qatar has expanded its counterterrorism cooperation with the United States in recent years and has made terrorist financing an increased focus of its domestic counterterrorism activities, in response to criticism over gaps in its financial system. In 2019, Qatar ratified new anti-money laundering and terrorism finance legislation.
Aside from formal central bank foreign reserves, which stood at around USD36.8bn in January 2021, sufficient for well over three months’ import cover, Qatar has other liquidity and more than USD200bn in foreign assets held by the Qatar Investment Authority. The country also has the capacity to raise foreign exchange through borrowing, such as the USD10bn bond issue in April 2020. As such, Qatar is very likely to remain committed to, and capable of maintaining, its currency peg to the US dollar. There are currently no known international sanctions against Qatar.
Qatar is rated AA- with a stable outlook by the three main credit rating agencies, reflecting its robust financial buffers, vast hydrocarbon reserves and high per capita income. Qatar was last downgraded in 2017 following the onset of the quartet’s boycott and liquidity risks related to the banking system’s dependence on non-resident deposits, which account for more than a quarter of total deposits, though non-resident deposits are recovering. Banks have also been able to diversify the geographical composition of non-resident deposits and lengthened their maturity structure.
Meanwhile, post-boycott, geopolitical risks have receded. The combination of better liquidity management, the easing of Qatar’s supply chain risks and its return to the Arab fold make a strong case for a rating upgrade in coming months. Therefore, sovereign default risks are low.
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