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.