Qatar Crisis – Carefully Navigating Through Saudi Led Blockade

The background: How it all began

In mid-2017, even as the Islamic State (IS) was rapidly losing territory in Syria and Iraq, a sudden rise in the yet unresolved tensions involving a few Arab states rattled the Middle East region’s geopolitical set-up. In an unprecedented diplomatic move, on June 5, 2017, the Kingdom of Saudi Arabia (KSA), United Arab Emirates (UAE), Bahrain, and Egypt cut-off trade ties with Qatar for its alleged support to terrorist groups (such as Al-Qaeda). The KSA-led Arab ‘quartet’ asserted that to normalize ties, Qatar would have to agree on several demands, including the shutdown of the Al Jazeera media network and the breaking of ties with the allegedly disruptive Iranian regime. The move was aimed at regional isolation of Qatar, one of the world’s wealthiest nations (2018 estimated GDP per capita at current prices: approximately $67.8k; April 2018 estimates of IMF), by imposing a blockade on the country. In response, Qatar remained firmly entrenched in defiance, calling the allegations unfounded and affirming the sanctity of its sovereignty. This blog explores the broad, proactive steps initiated by this small yet wealthy Arab state to nullify the effects of the blockade.

The after-effects: Scramble for resources and a hallmark achievement in dairy

Since approximately 40% of Qatar’s food requirements were supplied from the land border shared with KSA and ships’ access to Qatar’s ports was denied by the UAE, Qatar was forced to overdrive in the days following the blockade to ensure that the daily supplies were amply made available to its 2.7 million inhabitants. Essential supplies were pulled in great numbers from friendlier countries in the vicinity, particularly Iran and Turkey. In fact, two C-17 Globemaster military transportation aircraft were also thrown into the mix for good (or desperate?) measure to load up on food supplies. Oman, which adopted a neutral stance in the diplomatic stand-off, also lent a helping hand by opening its Sohar and Salalah ports for shipments to Qatar.

The situation in Qatar has stabilized in recent months, partly because of its newly found mantra of self-reliance. It is more evident in the northwest of Doha – at Baladna Farms, which houses not only the approximately 10k cows ‘flown-in’ from abroad since the blockade began but also the proud legacy of a nation achieving self- sufficiency in dairy requirements within a few months. And Qatar continues to set itself more ambitious targets. In its quest for food security, the country targets 60 % of its requirement for vegetables to be produced locally in three years, as opposed to just 15% in the pre-blockade era. This intense urgency to promote local enterprise and drive self-sufficiency is also underlined by Qatar Development Bank’s (QDB) funding support of approximately QAR 8 billion in 2018 for Qatari companies, including small and medium-sized enterprises.

Fruitful foreign sojourns: Diplomatic outreach far and beyond to enhance market access

In recent months, Qatar has stepped on the gas with respect to its diplomatic outreach to countries across the globe, be it Europe, Africa or Latin America. The visits of official delegations to Turkey (planned investments: $15bn) and Germany (targeted investments: €10bn over the next five years) seem to be particularly promising. The fact that these diplomatic delegations have invariably been led by Qatar’s talismanic Emir, Sheikh Tamim bin Hamad Al Thani, underlines the government’s commitment to tapping developed as well as emerging markets with equally royal zeal.

Financial agility: QIA and the banking system undercut the risk of adverse systemic impacts

The Qatar Investment Authority (QIA), Qatar’s gigantic treasure box and an A-list sovereign wealth fund with assets estimated at $320 billion as of September 2018 (Source: Sovereign Wealth Fund Institute), has shown remarkable agility to strengthen the government’s liquid resources and cancel the country’s capital flight. QIA is said to have slashed its foreign investment holdings, including stakes in Tiffany’s, Veolia Environnement, and Credit Suisse to channel approximately $40 billion into the Qatari economy. The rapid deployment of these funds and part of the abundant forex reserves of the Qatar Central Bank (approximately QAR167bn or $ 45.8 billion at the end of May 2017 demonstrated the firepower of the nation to protect the liquidity of the banking sector. The strategy to allow a temporary dip in forex reserves has been spot-on; Qatar Central Bank (QCB) data indicates that forex reserves crossed the pre-blockade mark at the end of November 2018 to reach approximately QAR176 billion (or $48.7 billion). The banking sector’s reassuring statistics on key metrics such as capitalisation (capital adequacy ratio>15.5% as of September 2018) and NPL ratio (approximately 1.7%) present a picture of complete stability. Accordingly, Qatar appears to have substantially lowered the risk of any ‘black swan’ events impacting its financial system as a result of the blockade.

In fact, following the initial liquidity challenges, Qatar is now making aggressive investment bets, which appear to be part of a carefully designed strategy to deploy capital in countries that have a significant influence in the MENA region. In this environment, the acquisition by QIA in September 2018 of Glencore’s 14.16 % stake in oil giant, Rosneft, for € 3.7 billion, should be seen as a stand-alone deal aimed at strengthening Qatar’s ties with the powerful Russian Federation. Separately, Qatar Petroleum (QP) has noted that it intends to spend approximately $20 billion in various projects in the US over the next five years.

Milking the LNG cash cow: Medium-to-term economic growth prospects appear bright

Qatar, which possesses the third largest gas reserves globally, has promising economic prospects, with IMF predicting GDP growth to remain in an uptrend (+3.1% y/y in 2019E vs. +2.4% in 2018E and +1.6% in 2017). Over the medium-to-long term, growth visibility looks solid as well, given Qatar’s plans to expand natural gas production capacity at the massive North Field reserve. QP, the world’s leading supplier of liquefied natural gas (LNG), aims to enhance its output capacity by approximately 43% to 110mtpa by end-2023/early-2024 (vs. 77mtpa, currently). Due to LNG’s growing global appeal as a relatively cleaner burning fuel compared to oil and coal, Qatar should be able to locate and lock new markets for its rising natural gas output.

Investors’ faith vindicated: Equity market recoups losses, mega bond issuance a roaring success  

Qatar’s multi-faceted and effective response to the blockade has deservedly been rewarded with a pat on the back by investors. By the end of December 2018, Qatar’s benchmark DSM (Doha Stock Market) index closed 3.8% above the pre-blockade mark, riding on stellar gains in 2018 (+20.8%) to emerge as one of the top-performing global equity indices. Notably, the index made a spirited dash in the last quarter of CY 2018 to outshine the MSCI EM index.

In addition, bond investors were equally enthusiastic, piling up bids in April 2018 of $ 52 to $ 53 billion for a $ 12 billion sovereign issuance. Importantly, Qatar’s credit rating has held largely steady across all the three major credit rating agencies during the period immediately following the blockade. The outlook has, in fact, improved to ‘Stable’ from ‘Negative/Negative watch.’

Diplomatic stalemate: No end-game in sight

At present, there appears to be a diplomatic stalemate between the two sides. So the question remains that has Qatar’s blockade been a misjudged step by the KSA-led group of blockading nations? Qatar’s nonchalant, business-as-usual approach towards trade and investment likely indicates that it may have been so. And there are myriad of factors which may have circumvented a potentially negative outcome for Qatar, some of which have been outlined below:

  • The limited economic influence of the sanctioning countries (which accounts for only 8% of Qatar’s exports pre- blockade) has led Qatar to remain steadfast in its position
  • The absence of unanimous finger-pointing at Qatar, even within the MENA region, has allowed the country to redraw its cross-border trade and investment linkage promptly
  • The insurance offered by QIA’s extensive wealth reservoir and QCB’s foreign reserves have ensured that any sense of panic from temporary capital outflows from Qatar has been short-lived
  • The Qatari authorities’ relentless efforts to promote self-reliance across various fields has enhanced investor confidence and laid the foundation for economic sustenance
  • Qatar’s stated intent to aggressively enhance its LNG output capacity provides an avenue, quite distinct from its Arab neighbors, to drive the nation’s economic agenda

In a nutshell, Qatar continues to shine brightly, not only because of the enormous resources at its disposal but also because of its relentless readiness to withstand the regional boycott.

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Sameer Tendulkar
Sameer Tendulkar
About the Author

Sameer has over 10 years experience as Vice President and Project Manager on the buy- and sell side of equity research. He has a Master’s degree in Finance and has cleared the CFA Level 2 exams.

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