“The severity of the diplomatic dispute between Gulf countries is unprecedented, which magnifies the uncertainty over the ultimate economic, fiscal and social impact on the GCC as a whole,” said Steffen Dyck, Moody’s Vice President — Senior Credit Officer and co-author of the report.
“While we expect the GCC to overcome its divisions, tensions persisting — or even escalating — would be the most credit negative for Qatar and Bahrain.”
Saudi Arabia, Egypt, the UAE and Bahrain cut diplomatic and trade ties with Qatar in June, accusing the government of supporting and funding terrorism, an allegation that Doha has denied.
Qatar faces large economic, financial and social costs stemming from related travel and trade restrictions more than three months since the diplomatic row began, Moody’s said, and the country’s future credit trajectory will depend heavily on the evolution of the dispute.
The impact to-date has been most acute for the trade, tourism and banking sectors with capital outflow estimated at $30 billion between June and July, and expected to further widen as GCC banks have opted not to roll over their deposits, Moody’s said.
The ratings agency also estimated that Qatar deployed $38.5 billion, equivalent to 23 percent of the Gulf state’s GDP, to support the economy in the two first months of the sanctions.
“Although negative foreign investor sentiment has also increased Qatar’s financing costs and led to capital outflows, Moody’s does not expect Qatar to raise funds in the international capital markets this year. This should cushion Qatar against higher funding costs for the time being,” it said.
Bahrain, however, is most vulnerable should the regional tension escalate, Moody’s said.
“Rising debt, increased issuance from other GCC sovereigns, and rising US interest rates have put pressure on Bahrain’s financing costs since 2014. The broad-based deterioration of Bahrain’s credit profile and its diminished shock absorption capacity makes it susceptible to any reassessment of risk by foreign investors.”
Manama’s strong alliance with Saudi Arabia and the UAE, which have provided support in the past, mitigates this risk to some extent, Moody’s said, although the “form and timeliness of such support lacks clarity.”
“The tensions highlight intra-GCC divisions, and although Moody’s believes that a realignment within the GCC is unlikely, the diplomatic rift will inevitably impair the functioning of the grouping, the more so the longer it persists,” the ratings agency said.