Qatar crisis forces investors to rethink Gulf risk

The ongoing blockade against Qatar has morphed into a diplomatic stalemate that is changing perceived investment risks across the whole of the Gulf. A bloc made up of Saudi Arabia, the United Arab Emirates, Bahrain and Egypt slashed the veil of apparent serenity enveloping the region in June when they imposed sanctions on Qatar for its alleged support of forces supposedly undermining regional stability. The world’s largest exporter of liquefied natural gas (LNG) strongly denied any wrongdoing and has not ceded to any of the bloc’s demands. Despite Kuwait, Turkey and various other members of the international community trying to broker a deal, both parties remain wide apart, escalating a war of words that is resonating in the minds of foreign investors active in the region.

“This will have an impact on investors’ sentiment on the region more broadly,” says Allison Wood, a Dubai-based consultant for global risk and strategic consulting firm Control Risks. “The Gulf is a place that investors have looked at as a bastion of stability, but this unfolding situation has reminded people that even in the Gulf... the operational environment can change quite literally overnight.”

Heading to a stalemate

Saudi Arabia took the lead in severing diplomatic ties with Qatar and instating a land, sea and air blockade on traffic in and out of the neighbouring country for its 'grave violations' concerning, among other things, adopting various terrorist and sectarian groups that intend to destabilise the region, including the Muslim Brotherhood Group, Islamic State and Al-Qaeda, and supporting the activities of Iranian-backed terrorist groups, according to a note written by Saudi Arabia's foreign affairs ministry in June . Saudi Arabia then rallied the UAE, Bahrain and Egypt to issue a list of 13 demands for Qatar to meet, featuring curbing diplomatic ties with Iran and shutting down contentious state broadcaster Al Jazeera.

Qatar denounced the “false allegations… made to tarnish the public opinion's image of the state of Qatar”, according to a June statement by the foreign affairs ministry, and the country remains defiant despite the unfolding blockade.

With neither side willing to back down after weeks of talks, they are now facing the economic consequences of this diplomatic strife. Qatar’s import bill has skyrocketed as the country, which used to rely on the land border with Saudi Arabia for most of its imports, has had to rethink its trade routes beyond the region, such as importing food via air routes from Iran or Turkey, estimated to be 10 times more costly than traditional land connections. The country seems to be willing and able to bear this burden as long as its LNG exports are not compromised, guaranteeing a reliable hard currency lifeline.

However, there are early signs that the situation is taking a toll on its financial stability. The Qatar Investment Authority (QIA) has assets of about $300bn, but the central bank alone burnt $10.4bn in reserves in June, when its overall stock fell to $24.4bn, according to its latest figures.

“While Qatar's hydrocarbon exports are not affected at this stage, there have been reports of disruptions to certain non-hydrocarbon exports and a forced shutdown of helium production,” credit rating agency Moody’s wrote in July, when it changed its credit outlook on Qatar to 'negative' from 'stable'. “The termination of direct flights between Qatar and coalition countries will affect services trade in areas such as consulting and tourism. This will likely also affect the profitability of corporates, including government-owned or government-related entities such as Qatar Airways.”

Regional risk

However, risks seem to be on the rise across the whole region as the Qatar crisis drags on and highlights the Gulf’s largely opaque decision-making process.

“Despite a recent trend towards professionalisation of the public administration, [across the region] you do have quite a high concentration of power in the hands of a small group of individuals. That creates an environment in which you can see changes happen quite quickly, which makes it difficult for businesses to have a great amount of confidence in planning their operations and businesses over the long term,” says Ms Wood.

Greenfield foreign investment into Gulf Co-operation Council members fell to $11.08bn in the first half of the 2017, down from $23.5bn for the same period a year earlier, according to investment monitor fDi Markets.