Qatar could defend its currency for years in the face of other Gulf states, according to the country’s balance sheet, so the Riyal’s peg to the US Dollar is unlikely to fall victim to the region’s diplomatic crisis.
That means the Riyal’s Spot market peg of 3.64 to the Dollar is probably safe for the near 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.
The decision by Saudi Arabia, the United Arab Emirates, Bahrain and Egypt to cut diplomatic and transport ties threatens to hurt Qatar’s trade balance, suck deposits from its banks and push out foreign investment. Reflecting this threat, the Riyal fell last Friday in the offshore forwards market to its lowest level against the Dollar, when low Oil and Gas prices raised concern about all Gulf economies. But the world’s top liquefied natural Gas exporter is so rich that it could offset the 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.
Cutting Qatar’s credit rating to AA-, Standard & Poor’s put the government’s liquid external assets at 170% of gross domestic product, or about $295 billion, based on the International Monetary Fund’s estimate of Qatari GDP. Foreign investors have already started to sell Qatari Equities; a complete pullout could mean an outflow of nearly 10% of the Stock market, or about $15 billion.
Qatari banks had 451 billion Riyals of foreign liabilities in March 2017, 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 already started to cut their exposure to Qatar, and they could cut aggressively 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.
If foreign banks cut two-thirds of their exposure to Qatar in coming months, that could mean an outflow of over $80 billion.
Before the crisis, the IMF predicted firm Oil and Gas prices would help Qatar run a surplus of $1.2 billion this year, rising gradually to $4.7 billion in 2020, against a deficit of $3.5 billion last year. 10% of Qatar’s exports, which the IMF has estimated at $70 billion 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.