Under pressure from neighbors

On 5 June 2017, Saudi Arabia, the UAE, Bahrain and Egypt cut their diplomatic relations with Qatar, accus­ing Doha of supporting Islamist groups and terrorism, a charge Qatar denies. In addition, the states announced the suspension of air, sea and land transport and travel with Qatar. And, with the exception of Egypt, Qatari citizens are required to return home within two weeks. These restrictions, especially the fact that Qatar's land border with Saudi Arabia – its only land crossing – will be suspended, are more severe than those during a previous eight-month dispute in 2014, when Saudi Arabia, the UAE and Bahrain withdrew their ambassadors from Doha over similar accusations. At that time, trade and travel links were maintained.

In the near term, a military conflict appears unlikely, but a further escalation of economic measures, including actions against Qatari banks (reportedly Saudi and UAE banks have already delayed businesses with them), sanctions or a full-blown embargo, is possible if Qatar does not comply more earnestly with a 2014 agreement which requires it to act seriously against Islamist extremism. Also, Gulf media have aired rumors on a potential future coup against the head of state, Emir Sheikh Tamim bin Hamad Al Thani.

GDP growth will remain modest

As a result of persistently lower oil prices since mid-2014, real GDP growth fell already to +2.2% in 2016, the lowest annual increase since 1994, and compared to an average +12.2% in 2006-2015. Against the background of the increased political uncertainty, we have revised down our 2017 GDP growth forecast by -1pp to +1.8%. The expected slowdown reflects reduced regional trade, weakened corporate profitability as regional demand is cut off, lower investment and higher inflation. Assuming that regional relations will normalize by the end of this year, growth should recover to around +3% in 2018.

Inflation is set to rise but the exchange rate peg should hold

Inflation is forecast to rise from 0.9% y/y in March 2017 to about 3.5% y/y by the end of the year (against our pre-crisis forecast of 2.5% y/y) as a result of higher food prices and construction costs.

The riyal (QAR) is pegged at 3.64 to the USD. We expect the peg to hold as the Central Bank has large foreign exchange (FX) reserves (about USD33bn at end-March 2017) to support the currency.

Public finances to remain solid

After 16 years of continued large surpluses, persistent low oil and gas prices since mid-2014 pushed the fiscal account into a deficit in 2016, estimated at -4.5% of GDP. We expect a similar deficit in 2017 and a reduction to -2.5% in 2018. Public debt rose from 32% of GDP in 2014 to 48% in 2016 (around USD75bn) and is forecast to increase to about 52% at end-2018.

However, Qatar will remain a large net external creditor thanks to the huge foreign-asset position in the QIA (currently estimated at USD335bn).

External liquidity to remain unproblematic

In line with the fiscal account, the current account shifted into a deficit in 2016 (estimated at -2.5% of GDP) after 17 years of continued large surpluses. We expect moderate annual shortfalls of about the same size in 2017-2018 as well.

External debt is relatively high, incurred by oil and gas investments since the 2000s, but repayment obligations are unlikely to present liquidity problems. The debt service to export earnings ratio stands at a moderate 15% or so.

Financial resources will remain strong. Combined FX reserves of the Central Bank and the QIA represent well over 200% of annual GDP and cover more than 70 months of imports.