Diplomatic chaos in the GCC does not mean an end to the bid for broader emerging markets credit, or even for the GCC, but it is a reminder that even the deepest of due diligence cannot prepare for all eventualities.
Analysts warn that the most recent spat between Qatar, Saudi Arabia, the UAE and Bahrain is one of the most worrying in several years. Standard Chartered’s global research team refers to the “unprecedented isolation of a GCC member.”
Not only have Saudi Arabia, the UAE, Bahrain and Egypt among others cut diplomatic ties with Qatar over its alleged links to Islamic extremist groups, they have also closed land crossings, airspace and sea access, and expelled any Qatari citizens working and living in the respective countries.
It is not a dispute, believes Standard Chartered, that can be resolved quickly. The economic implications for Qatar could be great, and Standard Chartered expects a wider repricing in GCC debt particularly due to the “limited spread cushion”.
But the issue also shines a light on the level of exposure GCC banks have to assets across the region, and argues for greater focus on building a local demand base outside of the banking system. This means promoting local asset management firms, insurance and pension companies.
Policymakers need now to focus on deepening local capital markets, and reducing reliance on both interbank lending, and international investors to provision for such market shocks.
International investors are often identified as the least “sticky,” but the over-exposure to GCC banks, through their participation in bond issues, and in syndicated lending, is just as likely to bring the house of cards tumbling down.
The vulnerabilities seemed clear on Tuesday when reports that the central banks of Bahrain, Saudi Arabia and the UAE asked banks to provide details of their exposure to Qatar sent Qatari bond prices tumbling.
Qatar Reinsurance’s recent perpetual bond had sold off by 4.5 points by Tuesday morning, and Ezdan’s sukuk, issued in March, was down five points at the worst point.
Qatari banks will also feel the pain. Many have increased their reliance on external funding in recent years after money from oil deposits dwindled.
Qatari bank foreign liabilities represent 35% of total liabilities, and the bulk of this exposure is interbank borrowing (46% of the total) and non-resident deposits (42%), writes Standard Chartered. The state’s smallest banks are most reliant on external sources for wholesale funding from GCC banks ex-Qatar, and therefore may be under the greatest strain.
Local demand is something that international investors identify as a favourable dynamic when investing in the region, but when that demand is concentrated in the banking sector, it leaves credit exposed to unforeseen risk.
Whether or not the central banks intend to ban investment in Qatari assets — the read which many investors are taking from reports — the mere suggestion should be enough to prompt policymakers into action. Once the dust has settled on this dispute of course.