The Daily Update - Qatar

Given the recent spat between Qatar and other Gulf states we’ve summarised some of our analysis of recent and ongoing events within a broader economic and geopolitical context. We continue to monitor the developments but signs increasingly point towards constructive dialogue between the states. Also motivations for a peaceful resolution exist on all sides including Western countries with vested energy and military interests in the region. Moreover, it’s important to consider the country’s risks both on a stand-alone basis but also relative to the market’s pricing - where it continues to offer stand-out value. Qatar’s 30-year bonds yield in excess of 4.4% for AA rated credit from what is the wealthiest country in the world; which according to our models are as much as 5 notches cheap.

The abruptness of the announcement from Bahrain and Saudi Arabia and subsequently UAE and Egypt yesterday left markets uncertain as to whether there was a significant unknown rationale for the united front against Qatar. As more became clear it seems that the timing and brashness of the move stemmed from upset over an alleged ransom payment to al-Qaeda for the release of a royal hunting party (the straw that broke…) and possibly an emboldened Deputy Crown Prince in Saudi following the recent visit from President Trump. Accusations of Qatar’s terrorist financing are purported to be a main rationale for the move; indeed tougher regulation to prevent terror financiers operating in Qatar would be welcome development from all this. But their motivation seems as much based on Qatar’s media coverage of the pro-democratic ‘Arab Spring’ that caused civil unrest (and expense) in all the countries involved in the dispute. Indeed this is an obvious reason why Egypt has joined the affront: having labelled Al Jazeera, Sky and the BBC as terrorist supporters for their coverage of the Muslim Brotherhood.

Ongoing spats and accusations with Qatar are known to anyone familiar with the region. Not only because of their contribution to the Arab Spring, but also because of their necessary diplomatic ties to Shia Iran – its cross-waters neighbour and co-owner of the South Pars / North Dome gas field in the Persian Gulf. This is the world’s largest gas field with at least 43 trillion cubic meters of gas reserves. With Iran being the major Shia rival to Wahhabi Saudi Arabia and the rest of the Sunni ruled Gulf, Qatar has always had to avoid treading on its bigger neighbours’ toes on either side.

Importantly, ‘Qatar has not met this escalation with escalation’. Qatar’s Foreign Minister, Sheikh Mohammed Bin Abdulrahman Al Thani told reporters that ‘the strategic choice of the state of Qatar is to solve any dispute through dialogue’. From the other side of the Gulf waters Iranian Foreign Minister Javad Zarif wrote, ‘Neighbours are permanent; Geography can't be changed. Coercion is never the solution. Dialogue is imperative, especially during blessed Ramadan.’

The influence of US and the West are also not to be overlooked in their interests of driving stability for the region. Not only does the US have significant oil and energy interests in Qatar and the GCC region, but its important strategic military bases span the region with: CIA Drone base in Saudi Arabia, Deep Sea Water Port and Airbase in UAE, and in Qatar one of the US Central Command’s most important overseas Airbases. Soon after the announcements from Bahrain and Saudi Arabia to cut ties with Qatar, US Secretary of State Rex Tillerson spoke of how ‘It is important that the GCC remain a unified [front]’ and that he does not expect the rift ‘to have any significant impact, if any impact at all, on the unified fight against terrorism’.

Despite it being Ramadan there has been noticeable local buying of Qatari debt today as well as investments from Europe; such that spreads have narrowed. As more has come to light it seems that it is in none of the parties interests to see this dispute escalate beyond the current power-play. So from our perspective the downside risk is mostly limited to short term volatility.

Given Qatar is the wealthiest country per capita in the world we remain highly confident in its financial capacity and motivation to stand by its debt obligations. Qatar is undoubtedly one of the most fortunate countries in term of natural resource wealth relative to its population. Some sources have estimated that proven oil and gas reserves equate to 3-4 million dollars per capita even at current prices – more than any other country in the world. Not only this but it has invested shrewdly in developing its energy industry as well as diversely invested domestically and internationally, such that it has seen its credit rating rise 5/6 notches in aggregate since the turn of the century to Aa3/AA. It now has the highest GDP per capita in the world and is 7 star according to our Net Foreign Asset analysis.

As such it would be counterproductive for such a wealthy nation to declare itself unable to fulfil its international obligations. Indeed we are not aware of any creditor nations that has ever defaulted on its international debt as such a move would not only close the nation off to international markets but open the possibility of litigation and seizure of overseas assets. Wealthy countries simply have a lot more to lose. But being the richest kid on the block and by no means the biggest, Qatar has always had to negotiate a sensitive diplomatic path to make the most of its economic fortune.

If there’s anything that the last few years has taught us is that negative political or geopolitical events can be a risk regardless of region or how ‘advanced’ an economy is. Europe has seen its fair share of mass protests, unemployment and extreme party momentum. The US has elected its most bombastic leader and the UK is heading for an uncertain economic future with Brexit. We continue to see a greater upside than downside in Qatar and stand-out relative value in such high quality credits backed by considerable net foreign assets.

Please read this important information before proceeding. It contains legal and regulatory notices relevant to the information on this site.

This website provides information about Stratton Street Capital LLP ("Stratton Street"). Stratton Street is authorised and regulated by the UK's Financial Conduct Authority. The content of this website has been prepared by Stratton Street from its records and is believed to be accurate but we do not accept any liability or responsibility in respect of the information of any views expressed herein. The information, material and content provided in the pages of this website may be changed at any time by us. Information on this website may be out of date and may not be updated or removed.

The website is provided for the main purpose of providing generic information on Stratton Street and on our investment philosophy for the use of financial professionals in the United Kingdom that qualify as Professional Clients or Eligible Counterparties under the rules of the United Kingdom Financial Conduct Authority (the "FCA"). The information in this website is not intended for the use of and should not be relied on by any person who would qualify as a Retail Client. Products and services referred to on this website are offered only at times when, and in jurisdictions where, they may be lawfully offered. The information on this website is not directed to any person in the United States. The provision of the information on this website does not constitute an offer to purchase securities to any person in the United States (other than a professional fiduciary acting for the account of a non-U.S person) or to any U.S. person as such term is defined under the Securities Act of 1933, as amended.

The website is not intended to offer investors the opportunity to invest in any Alternative Investment Fund ("AIF") product. The AIFs managed by Stratton Street are not being marketed in the European Economic Area ("EEA") and any eligible potential investor from the EEA who wishes to obtain information on the AIFs will only be provided with materials upon receipt by Stratton Street of an appropriate reverse solicitation request in accordance with the requirements of the EU Alternative Investment Fund Managers Directive ("AIFMD") and national law in their home jurisdiction. By proceeding you confirm that you are not accessing this website in the context of a potential investment by an EEA investor in the AIFs managed by Stratton Street and that you have read, understood and agree to these terms.

No information contained in this website should be deemed to constitute the provision of financial, investment or other professional advice in any way. The website should not be relied upon as including sufficient information to support any investment decision. If you are in doubt as to the appropriate course of action we recommend that you consult your own independent financial adviser, stockbroker, solicitor, accountant or other professional adviser. Past performance is not necessarily a guide to the future. The value of investments and the income from them may go down as well as up. An application for any investment or service referred to on this site may only be made on the basis of the offer document, key features, prospectus or other applicable terms relating to the specific investment or service.

Where we provide hypertext links to other locations on the Internet, we do so for information purposes only. We are not responsible for the content of any other websites or pages linked to or linking to this website. We have not verified the content of any such websites. Such websites may contain products and services that are not authorised in your jurisdiction. Following links to any other websites or pages shall be at your own risk and we shall not be responsible or liable for any damages or in other way in connection with linking.

By using this site, you should be aware that we may disclose any information that we hold about you to any regulatory authority to which we are subject, or to any person legally empowered to require such information.

This website uses cookies to improve user experience, by clicking the "I Accept" button below means you consent to the use of cookies on our website.