QATAR: The Qatar question

A prolonged diplomatic crisis is forcing fund managers to rethink their strategies on Qatar. George Mitton reports.

Over an ominous soundtrack, a voice with a British accent lists a litany of accusations that are both lurid and contentious. “Qatar has always been a pariah state,” intones the voice, which claims Qatar, “the richest country in the world”, is a financier of terrorism.

The video was posted on social media by a group called Qatar Exposed, which appears not to have its own website and seems to be unconnected to, a website set up in 2015 by trade unionists. The video has prompted a lively debate on Twitter, with many users labelling it “propaganda” and demanding to know who has financed it.

Although details of the video’s creation are murky, it is hard not to connect it with an ongoing crisis in the Gulf in which Saudi Arabia, the UAE, Bahrain and Egypt have severed diplomatic ties with Qatar. This rift threatens the unity of the Gulf countries, with significant implications for investment managers.

How it began
Tensions have been brewing for some years between Qatar and its neighbours – principally Saudi Arabia, historically the Arabian peninsula’s political and economic heavyweight. In the past two decades, canny exploitation of Qatar’s immense gas reserves have made the small country dizzyingly rich. On some measures, Qatar’s population is the wealthiest, per capita, in the world.

Qatar’s growing wealth has allowed the country to play a bigger role in regional politics. It spread its influence through its media company Al Jazeera, raised its profile by successfully bidding to host the 2022 FIFA World Cup, and tried to position itself as a linchpin of regional diplomacy. After the Egyptian revolution of 2011, Qatar cast itself as a mediator. However, Qatar’s involvement has been viewed as meddling by opponents of the Muslim Brotherhood, who say the state has used its wealth to spread Islamism.

Saudi displeasure at Qatar’s activities seems to have been expressed behind closed doors. In 2013 and 2014, secret agreements were drawn up in which several Gulf states including Qatar agreed, among other things, not to interfere in the internal affairs of other Gulf nations and to block support for “deviant” groups, such as activists and extremists. The first of these documents, known as the Riyadh Agreement, came to light this year and was mentioned in the Qatar Exposed video, which claimed Qatar “broke every one of its Riyadh Agreement promises”.

On June 5, 2017, the diplomatic split was thrust into public view when Saudi Arabia, the UAE, Bahrain and Egypt cut relations with Qatar. With the exception of Egypt, these states ordered Qatari citizens to leave their countries and banned their own citizens from travelling to Qatar.

Several months later, the embargo shows no signs of ending. Qatar, supported by food supplies from Iran and Turkey, says it will not comply with its opponents’ demands, which it says challenge its sovereignty.

What it means
Equity markets reacted with predictable alarm to Qatar’s predicament. In the five months after the embargo began, the Qatar Exchange index has fallen by about a fifth. In July, ratings agency Moody’s downgraded Qatar’s outlook from stable to negative and warned, presciently, “that a quick resolution is unlikely and that the stalemate may continue for some time”.

The agency also downgraded the outlook on several of Qatar’s state-owned enterprises, including Qatar Petroleum, the national oil and gas company, from stable to negative.

Falling confidence in Qatari assets has been particularly painful for investors who focus solely on the country. The Qatar Investment Fund, an investment vehicle set up in 2007 to invest principally in Qatari equities, has distanced itself from association with the country.

The fund, which is domiciled in the Isle of Man, recently announced plans to change its name to the Gulf Investment Fund and to remove a cap that prevents it investing more than 15% of its assets outside of Qatar.

“The board is conscious of the risk to the company from having a principally single-country focus,” said a statement by the fund.

Even the institutions that might be relied upon to provide a buffer to Qatar’s faltering fortunes have come under scrutiny. Fitch Ratings, another ratings agency, recently cut its historic estimates of the assets of the Qatar Investment Authority (QIA), a sovereign wealth fund. Abdulla Bin Saud Al-Thani, the central bank governor, told a news channel the QIA had $300 billion of assets that it could liquidate to defend the economy. The sum was apparently less than Fitch Ratings had supposed and was less than the sum of $335 billion estimated by the Sovereign Wealth Fund Institute, a consultancy, earlier this year.

Fitch Ratings also sent a warning to Qatar by downgrading the country’s long-term issuer default ratings by one notch to AA-. Like Moody’s, Fitch Ratings did not expect a quick resolution to the conflict and warned of a risk of further escalation. It added that “the full financial and economic impact of the embargo is uncertain and could prove to be larger than we currently expect”.

What next
The implications of the Qatar dispute are worrying for regional unity. In previous years, fund managers and others had cautiously predicted closer ties between the six countries of the Gulf Cooperation Council. A greater harmonisation between regimes was deemed to be positive for economic growth by allowing companies to trade more seamlessly across the region and realise economies of scale. However, the Qatar dispute indicates that, for instance, a common Gulf currency and a pan-GCC passporting regime for investment funds are now very distant prospects. Indeed, Qatar’s very membership of the GCC is in question, with Bahrain’s foreign minister having called for Qatar’s membership to be “frozen”. Bahrain would not participate in an upcoming GCC summit if Qatar were present, he said.

The dispute could create a closer unity between the Gulf states that are most opposed to Qatar. Saudi Arabia appears to want a stronger regional bloc, for reasons that reveal another facet of the crisis: that Qatar is accused of being too friendly with Iran, whose influence across the Middle East is resented and vigorously opposed by Saudi Arabia and its allies.

As well as stopping Qatar’s alleged support of extremist Islamists, the Saudi-led embargo hopes to force Qatar to distance itself from Iran. This demand has gained urgency as the Saudi-led intervention in Yemen, targeted at Houthi rebels, which Riyadh says are propped up by Iran, drags on.

In fairness, Qatar has an interest in being on good terms with Iran, which has shared ownership of Qatar’s major national asset, the enormous South Pars/North Dome gas field. It does not make sense to be at loggerheads with a neighbour who has joint custody of your national jewel. As Saudi Arabia and its allies continue to press their demands, they must take care that their belligerence does not push Qatar closer to their enemies.

©2017 funds global mena

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