Our thoughts on the QAR peg - BBH

"Qatar is fending off the pressures stemming from the Saudi-led embargo.  Yet while the QAR peg appears safe, we believe Qatari officials could have handled the situation better," economists at Brown Brothers Harriman explain.

Key quotes:

"Saudi Arabia, Egypt, Bahrain, and the UAE broke off economic and diplomatic relations with Qatar on June 5.  The group claims Qatar is supporting terrorist groups and submitted a list of 13 demands that Qatar must fulfill before the embargo is lifted." 

"The deadline has passed with no deal in sight.  So far, Qatar has rejected all 13 demands by the Saudi-led group.  A new set of demands appears likely but it remains to be seen what they might be."

"US Secretary of State Tillerson is in the region this week, meeting with diplomats in Kuwait, Qatar, and Saudi Arabia in an effort to secure a deal.  It seems the US is allowing Kuwait take the lead in mediating for now, but the row puts US in a difficult position since it involves US allies on both sides.  Indeed, after first seeming to support the actions against Qatar, the US subsequently sold Qatar $21 bln worth of weapons."

ECONOMIC OUTLOOK

"The IMF just completed its annual Article IV consultation with Qatar in April.  The tone was generally upbeat, coming before the diplomatic crisis that started in June.  Specifically, the IMF “Directors concurred that Qatar’s fixed exchange rate regime remains appropriate. They noted that further strengthening the monetary policy framework as well as deepening domestic financial markets, particularly the domestic debt market, will prove helpful as the economy diversifies.”

"The economy was already sluggish as energy prices remain low.  GDP growth is forecast by the IMF to accelerate modestly to 3.4% in 2017 from 2.7% in 2016.  However, this latest leg down in oil should highlight downside risks to the growth forecasts."

"The IMF noted that fiscal policy has already been adjusted for the new environment of lower energy prices.  Yet despite significant subsidy cuts, the government has issued a significant amount of debt (both external and internal) to finance ongoing budget deficits.  The central budget deficit came in at an estimated -9.0% of GDP in 2016 vs. a 1.2% surplus in 2015.  The gap is seen narrowing to –7.7% 2017."  

"The external accounts are likely to worsen further.  Low energy prices have hurt exports, and the current account deficit was an estimated -3.5% of GDP in 2016.  The IMF forecast the current account to move back into surplus in 2017 and 2018, but this seems too optimistic in light of low energy prices."  

"Qatar’s main export markets are Japan, Korea, India, and China, which together account for nearly three quarters of the total.  These exports are mainly natural gas and crude oil.  Indeed, Qatar is the world’s largest exporter of natural gas, accounting for nearly a third of global shipments.  Qatari officials say that the Saudi-led embargo has had little impact on exports."