Until a week ago, Qatar’s story sounded like Alice’s in Wonderland. An amazing economy, the world’s biggest natural gas reserves, the 2022 World Cup and an ever increasing International influence… yet lots of things changed within a couple of days.
Indeed, on June 5th 2017, Saudi Arabia, the UAE, Bahrein and Egypt unexpectedly announced that they will sever ties with Qatar and accused it of financing terrorism and supporting Iran. Almost instantaneously, the country got locked down, flights to Qatar cancelled from GCC countries and the only road leading to Qatar (from Saudi Arabia) closed.
It therefore did not take long for Qatari citizens to get affected by this situation. Given that the country imports all its food, pictures of people panicking and emptying supermarkets circulated shortly thereafter. (Qatari Supermarket of June 5th)
As it makes no doubt that the country’s economy is endangered by the recent events, we wanted to explore various scenarios and see how the country’s currency – The Qatari Riyal (QAR) – would get react.
Optimistic – Replacing a wheel by another
It is no secret that Qatar has among the most favourable trade balances in the world. The country exports around $80 Billion while importing around $35 Billion. Besides, Qatar’s exports consist mainly of energy product (gas & oil) which are sold on International markets. Its imports on the other hand are quite diversified although vehicles are the greatest source of expenditure
Regarding its trade partners, the top export partners are mainly Asian countries (China, Japan, India, South Korea…).
So taking these elements into account one could be tempted to argue that Qatar’s economy would not really suffer. Its exports are mainly done on International markets and with countries that are not concerned at all by the recent political events. Besides, as countries such as Turkey and Iran have stepped in to provide support by sending food to Qatar amid fears of shortages, it seems that possibilities exist and B plans could prove decent.
Under this scenario, Qatar would develop more commercial ties with Iran, Turkey and Russia while retaining a positive trade balance. Logically, the QAR would have no downward pressure although the currency would not be liquid in neighbouring “not so friendly countries”.
This is actually already the case as the Qatari Riyal is no longer exchanged in UAE, which results in massive bid to mid spreads. As a matter of fact, rates shown to Qatari Riyal sellers in the UAE are currently 10% below the official rate – the reason being that no one wants to buy QAR in the region.
This being said, the GCC region is not strategic in terms of trade for Qatar. As most of its countries produce oil, there is no complementarity between economies. In other words, there are no trade comparative advantages to benefit from and a “regional quarantine” will not really harm Qatar’s economy.
Pessimistic – A Damocles Sword Called …. Embargo
As the US President has stepped in by criticizing Qatar’s financing of Terrorist Groups, the small Emirate has reasons to worry. Indeed, analysing the way things are evolving at an International level and how Western democracies are reacting, one could easily expect a gradual strengthening of sanctions.
Looking at how sanctions were imposed on other stronger countries’ (Russia) vital sectors (Energy & Banking), one could expect Qatar to follow the same path. Nevertheless and in spite of its positive trade balance, Qatar’s economy has a major weakness that relates to its poor diversification and almost exclusive reliance on Oil & Gas.
An embargo on oil & gas could bring the country to its knees within a very short period of time. Besides, should Qatar’s Asian partners decide to follow on the sanctions and diminish their imports, the scenario would turn dramatic.
From a currency perspective, the QAR would obviously not be able to sustain such conditions. Qatar Central Bank’s foreign currency reserves would quickly diminish while the currency would suffer. This would generate a massive cost push inflation that would have strong social repercussions.
Trading the Qatari Riyal
Currently there seems to be no need to worry yet. Sanctions are still quite limited and major efforts are being made in order to restore dialogue and create the conditions of a potential improvement. Besides, the Qatari Government does not seem to be a stubborn one, and it looks as if there could be hopes.
Nevertheless, should this crisis last long, should western leaders toughen their criticism, should Qatar’s leaders opt for rigidity or should they make the mistake of seeking Iran’s (or Russia’s) official backing – then things would turn quite sour.
For now, our opinion is that it is still all right to hold on Qatari Riyals though one needs to closely follow the political speech. At the 1st sign of escalation, we would advise you to get rid of your Qatari Riyals no matter the bid to mid spreads.
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