Qatar could defend currency for years, its balance sheet shows

It's so rich that it can offset threatened capital outflows by liquidating a portion of its reserves

Qatar could defend its currency for years in the face of economic sanctions by other Gulf states, the country's balance sheet suggests, so the riyal's peg to the US dollar is unlikely to fall victim to the region's diplomatic crisis.

The decision by Saudi Arabia, the United Arab Emirates, Bahrain and Egypt to cut diplomatic and transport ties this week threatens to hurt Qatar's trade balance, suck deposits from its banks and push out foreign investment.

Reflecting this threat, the riyal fell on Friday in the offshore forwards market to its lowest level against the dollar since December 2015, when low oil and gas prices raised concern about all the Gulf economies.

But the world's top liquefied natural gas exporter is so rich that it could offset the threatened capital outflows by liquidating just a portion of its financial reserves. And as long as it can keep exporting gas, its current account balance is unlikely to go deep into the red.

That means the riyal's spot market peg of 3.64 to the dollar is probably safe for the foreseeable future. Any decision to change the peg would essentially be political rather than economic.

At their lowest on Friday, forwards prices implied riyal depreciation of under 2% over the next 12 months.

Many economists at financial institutions in the Gulf decline to discuss Qatar publicly because of the political tensions, but privately they say they expect Qatar to defend its currency successfully.

"We are not looking for the Qatari peg to break," wrote Chris Turner, global head of strategy at Europe's ING, though he called the pressure on the riyal unprecedented and said other countries' experience in the past 25 years indicated that if the peg did break, the riyal could fall at least 20%.

Assets

Cutting Qatar's credit rating to AA- this week, Standard & Poor's put the government's liquid external assets at 170% of the gross domestic product, or about $295 billion, based on the International Monetary Fund's estimate of Qatari GDP.

Capital outflows could come in several forms. Foreign investors have already started to sell Qatari equities; a complete pull-out could mean an outflow of nearly 10% of the stock market, or about $15 billion.

Qatari banks had 451 billion riyals ($124 billion) of foreign liabilities in March, most in the form of loans and deposits from foreign banks. Less than half that is from banks in other Gulf states.

Some Saudi, UAE and Bahraini banks have already started to cut their exposure to Qatar, and they could cut aggressively if the diplomatic crisis continues and their governments order them to do so. Riyadh may also try to force foreign banks to choose between the Saudi and Qatari markets.

If foreign banks cut two-thirds of their exposure to Qatar in coming months, that could mean an outflow of over $80 billion.

Then there is the current account balance. Before the crisis, the IMF predicted firm oil and gas prices would help Qatar run a surplus of $1.2 billion this year, rising gradually to $4.7 billion in 2020, against a deficit of $3.5 billion last year.

10% of Qatar's exports, which the IMF has estimated at $70 billion this year, are to countries that have blocked trade, S&P calculated; import costs are likely to rise because of the closure of the land border with Saudi Arabia.

Costs may also rise as Qatar's isolation forces it to pay higher wages to the foreign professionals and workers who make up the vast majority of the population of about 2.6 million.

The result could be a current account deficit of several billion dollars annually while the crisis lasts - a drain on resources, but not a decisive one considering Doha's assets.

Because of its small size and the fact that many major banks have links to the government, Qatar would probably find it easier than most countries to impose capital controls if that became necessary to prevent residents from sending large amounts of money abroad.

Jason Tuvey, Middle East economist at Capital Economics in London, said he did not expect the riyal's peg to break. Even Riyadh, which also fixes its currency to the dollar to maintain investor confidence and limit volatility in its oil revenues, might want to avoid driving Qatar to take that step.

"After all, if Qatar is forced to devalue, fresh concerns may be raised about other dollar pegs in the region."