Qatar, Facing Economic Ramifications, Is Expected To Fall In Line With GCC

As Qatar was isolated from its Gulf Cooperation Council (GCC members) Wednesday – actions taken by Saudi Arabia, the UAE, Bahrain and Egypt include a ban on transport, financial isolation and breaking of diplomatic ties – the focus is now on accommodation at the negotiating table, several bank reports note. With the influential shipping channel Strait of Hormuz hanging in the balance, the official line is that “dialogue is imperative,” but at what cost to the Qatari economy?

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Actions by GCC Members – UAE to impose 15-year prison sentence for anyone speaking out in favor of Qatar

Qatar is being ostracized by GCC members for their support of Iran and alleged backing of terrorism, the topic of a recent tweet by President Donald Trump: “During my recent trip to the Middle East I stated that there can no longer be funding of Radical Ideology. Leaders pointed to Qatar – look!”

Trump’s statements in the region appeared to embolden GCC nations to take action they had on their agenda. US Secretary of State Rex Tillerson, speaking from Sydney, Australia, diplomatically explained the GCC action saying there was a “growing list of some irritants in the region that had been there for some time, and they bubbled up to a level that countries decided they needed to take action.”

Open discussion of the Qatari situation was quickly censored in GCC member state United Arab Emirates (UAE). Expression of a counter opinion would be met with a 15 year prison sentence and stiff fine imposed on “anyone who shows sympathy or any form of favouritism towards Qatar, or against anyone who objects to the position of the UAE, whether through social media, or any other forms of communication,” UAE Attorney-General Dr Hamad Saif Al Shamsi warned. “The tough decisions were taken in order to protect UAE’s national security, its supreme interests and interests of its people.”

While there is a tough talk on the ground, bank analysts think the conflict will end with Qatar acquiescing in a diplomatic enviornment that would appear to create a win for all involved.

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GCC Members – While Qatar sanctions are not new, they are the more extensive than in the past

In assessing the severity of the move, HSBC noted that punishing Qatar for its behavior is not new, but this time the actions have exceeded previous benchmarks.

HSBC’s Chief Economist Simon Williams notes the skirmish also flared in 2011 during the Arab Spring unrest when three Gulf states withdrew their ambassadors from Doha in 2014. Qatar ultimately stayed inside the GCC fold during this period and took no retaliatory action, as eight months of negotiation resulted in a political compromise.

While noting that the situation and severity of the punishment escalated, Williams says the probability is that, with Iran trying to ensure calmer heads prevail, a diplomatic solution will be found.

Deutsche Bank analysts Michael Hsueh and Grant Sporre, while noting that the root problem likely “may run quite deep,” nonetheless believe a negotiated solution is in the offing as there is little benefit conflict.

Tail-risk scenarios which might arise from an intensification of the foreign policy spat could lead countries toward either (a) less stringent compliance with Algiers Accord commitments or (b) a military escalation of sufficient severity to threaten the flow of oil shipments through the Strait of Hormuz, or a more perplexing combination of both events. However, neither of these seem likely to happen in the very near future.

Qatar isn’t a major oil exporter on a relative basis, the report noted and military conflict isn’t likely, given Saudi and allied strength in the region.

“Disagreements between GCC states … must be resolved through dialogue,” Qatari foreign minister Mohammed bin Abdulrahman said, which Deutsche bank points to as a statement indicating Qatar is likely to come back into the warm embrace of the GCC family rather than leave for tighter relations with Iran.

Likewise, HSBC noted the dependence Qatar has in the region, pointing to pain from increased confrontation:

Saudi Arabia has long stressed the importance of maintaining the unity of the GCC, suggesting they might wish to bring Qatar in line, not drive it toward other regional actors. There are important economic ties, too, that mitigate the risk of escalation, including the Dolphin pipeline that has the capacity to export 1.2trnc/m of Qatari gas to the UAE. Qatar is also host of the US military’s central command (CenCom) base for the Gulf, and is a major investor in the UK, Europe and US, creating interests that might encourage compromise.

The ban is likely to impact Qatar’s economy, particularly the banking sector. The Qatari currency was down significantly in morning trading and bonds were being shunned as S&P Global lowered its long-term rating to AA- on the nation based on the conflict with GCC members.

HSBC notes that all sides have an incentive to mend fences and move on:

More broadly, the deterioration in political ties will gauge sentiment among those investing in the domestic economy, particularly that of the contractors from the UAE and Saudi Arabia currently involved in Qatar’s large scale infrastructure projects. The travel and trade restrictions will also cause significant disruption. Although the Gulf states account for only 9% of Qatar’s imports, for example, this includes some 40% of Qatar’s food imports which flow largely across the now closed land border with Saudi Arabia. There are also significant foodstuff re-exports from Dubai.

With slumping oil prices and mounting Qatari government deficits, the expected path is for the Shia supporting Qatar to fall in line with the mostly Suni GCC.

However, the drums of war are also coming with Turkey possibly sending troops to Qatar.