Diplomatic dispute is credit negative for all GCC countries: Moody’s

The diplomatic dispute between Qatar and some other GCC countries is credit negative for the entire region, particularly Qatar and Bahrain, Moody’s Investor Service said in a report on Wednesday.

"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, a senior credit officer at Moody's.

"While we expect the GCC to overcome its divisions, tensions persisting -- or even escalating -- would be the most credit negative for Qatar and Bahrain."

Qatar’s future credit trajectory will heavily depend on how the dispute unfolds.

So far, the country’s economic landscape has already been through difficulties due to travel and trade restrictions. Sectors like trade, tourism, and banking have been the hardest-hit. During June and July, up to $30 billion flowed out of Qatar’s banking system.

In the meantime, the Qatar’s central bank has been supporting bank funds, spending $38.5 billion or 23 percent of GDP during the first two months of the sanctions, according to Moody’s estimates. This is expected to see further decline as GCC banks opt not to roll over their deposits.

“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,” the report added.

Bahrain is also susceptible to any reassessment risks by foreign investors due to its deteriorating credit profile and weak shock absorption capacity. Since 2014, escalating debt, issuance from other GCC countries, as well as US interest rates have impacted the Kingdom’s financing costs. Reliance on Saudi Arabia and the United Arab Emirates has mitigated this risk to some extent in the past but “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 firm said.