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, Baharain and Egypt to cut diplomatic and transport ties this week may hurt Qatar’s trade balance.
Reflecting this possibility, the riyal fell yesterday 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.
Cutting Qatar’s credit rating to AA- this week, Standard & Poor’s put the government’s liquid external assets at 170% of gross domestic product, or about $295bn, based on the International Monetary Fund’s estimate of Qatari GDP.
Capital outflows could come in several forms.
Some foreign investors have started to sell Qatari equities; a complete pull-out could mean an outflow of nearly 10% of the stock market, or about $15bn.
Qatari banks had 451bn riyals ($124bn) 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 started to cut their exposure to Qatar, and they could cut further 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. 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 $1.2bn this year, rising gradually to $4.7bn in 2020, against a deficit of $3.5bn last year.
Ten percent of Qatar’s exports, which the IMF has estimated at $70bn 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.
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.”
Qatar has been the world’s richest nation based on a per-capita purchasing power parity basis since 1998, when it surpassed the United Arab Emirates, according to data compiled by the International Monetary Fund. Average income in the country this year was projected at $129,112, about 12% more than the US and Saudi Arabia’s combined — though down from a peak of $147,854 in 2011, IMF data show.
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