Saudi Arabia and the UAE have recently declared sanctions against Qatar following comments from the Qatari emir featured in an article suggesting Iran’s importance in the region. Qatari officials claim the story was hacked, though Qatar has long been suspected of supporting Iran, even as the country has tried to position itself as a “regional maverick,” open to all sides.
Additional supporters of Qatari isolation include Bahrain, Egypt, Libya, Yemen and the Maldives. These sanctions follow U.S. President Trump’s trip to Middle East–a symbolic first state visit to Riyadh with a focus on securing contracts and combatting terrorism.
The actions against Qatar include a land and sea blockage and a blacklisting of many organizations and individuals accused of terrorist ties. For lifting of these sanctions, Saudi Arabia is demanding that Qatar limit the freedoms of Al Jazeera, cease their interference in other countries’ affairs, halt the funding terrorism, disavow ties with Iran, and expel resident members of Hamas and the Muslim Brotherhood. There is some speculation that Saudi aims to promote a change in Qatar’s leadership from the current emir, Sheikh Tamim bin Hamad al-Thani, who came to power in a bloodless coup in 2013.
There is indeed precedent for political turmoil between Qatar and other Gulf Cooperation Council (GCC) countries. Most recently, the 2014 “Riyadh declaration” ended a spat whereby Qatar pledged to stop interfering in domestic affairs of GCC countries, rein in the media, and expel senior Muslim Brotherhood individuals. At that time, actions against Qatar were less severe in that they did not include a land and/or sea blockage and there was no impact to private citizens.
Potential Economic Impact
We believe the economic impact in Qatar over the near term is likely to be modest. Qatar is a wealthy country. The current account surplus is 200% of GDP and therefore can offset economic strain. GDP per capita in Qatar is among the highest of all countries worldwide. And the GCC represents a limited portion of overall trade at 17% of total imports (mostly Saudi Arabia, UAE, Bahrain) and 6% of exports. Additionally, in the near term, there may be limited private sector impact as Qatari state investment has largely crowded out the private sector.
Finally, commodity prices have not jumped in the days following news of the sanctions. Commodity exports are likely to remain stable and Qatar’s role in OPEC also appears secure given Qatar’s reserve wealth. Qatar is the world’s largest LNG producer, has the world’s third-largest proven natural gas reserves and sources 30% or more of gas imported by many countries including the UK, South Korea, Taiwan, and India.
Longer-Term Geopolitical Risks
Extended isolation has the potential to shift the geopolitical balance. Qatar’s gas economy is reliant on Iran while the non-gas economy is dependent on travel and goods transit which requires positive relations with Saudi Arabia. As Qatar is pressured to disavow support for Iran, there may be economic and geopolitical consequences, including potential promotion of Qatar’s alliance with Iran who has already sent air shipments of food to Qatar and expressed that they will continue to send 100 tons a day as needed.
Finally, there is potential for turmoil to extend beyond Qatar. For example, Turkey has also backed Islamist movements, and Kuwait has also been friendly to Iran and the Muslim Brotherhood. This past week, Turkey has criticized Saudi sanctions and has approved a bill to train Qatari security forces.
Despite the recent tough talk, we believe that de-escalation is a more likely scenario over time, as maintaining the GCC framework is in the broad interest of Saudi Arabia, UAE, and Qatar. Further, U.S. military interests, including a large air base, and general western economic interests in Qatar make the likelihood of a negotiated and peaceful resolution more likely.
Market Reaction; Acadian Exposure
In the week following the announcement of sanctions, the Qatar market fell approximately 7%; pre-announcement returns had been flat for the year to date. As political risk continues to evolve, we expect continued market volatility.
Even prior to this week’s events, our outlook for the country has been negative despite valuations in line with MSCI EM: 15x trailing P/E. Key drivers include commodity price sensitivity and a weak corporate growth environment. Recent events have further dampened our outlook as market risk has increased.
Acadian strategies have limited exposure to Qatar.
As such, exposures in our emerging accounts are low and underweight. In our Frontier Communications Markets Equity strategy, holdings are residual from their former Frontier Communications designation; there has been limited trading since the upgrade to the MSCI Emerging Markets Index, as we’ve allowed only sales of Qatar stocks. Firm wide, we own Qatari securities across industries, though our largest holdings are in sectors less likely to be directly impacted, including telecom and infrastructure.
Given our limited exposure to Qatar, we believe the likely impact of such volatility may be modest in our strategies. If liquidity conditions deteriorate, our process will dynamically shift to limit selling into a weak market. Similarly, as political risk does not always translate into economic risk, we may find buying opportunities given our disciplined approach to stock selection. A catalyst for a potential market rebound would be Qatar backing down to honor Saudi/UAE demands. History and recent state expressions support this as a potential outcome. As this situation plays out, Qatar’s economy and corporate environment remain at risk.
About Asha Mehta
Asha Mehta, CFA, is a lead Portfolio Manager on Acadian Asset Management’s quantitatively managed strategies. Her thematic focus includes frontier emerging markets and sustainability investing. She is a member of Acadian’s team that manages the firm’s emerging markets strategies. Prior to joining Acadian, Asha worked as an investment banker at Goldman Sachs and at Centocor in a strategy role. Early in her career, she conducted microfinance lending in India. She is a global citizen that has traveled to over 70 countries and lived in six.
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