Why the Saudis Failed to Cripple Qatar

By: John_Mauldin

BY ALLISON FEDIRKA : Six months ago, Saudi Arabia announced the closure of its shared land border with Qatar in response to its supposed support of terrorism. The other Gulf Cooperation Council members denied Qatar use of their airspace and ports.

The measures were meant to bring the Qatari economy to its knees. However, the plan didn’t work out as planned and the effort ultimately failed.

The Initial Shock

At first, these measures seemed as though they might succeed.

The diplomatic dispute quickly hit banking and trade.

Since the Saudi announcement, an estimated $30 billion has been removed from Qatari banks, interest rates have risen, and deposits have declined. Foreign customers with deposits in Qatari banks have withdrawn and relocated their money.

Total deposits declined from 184.6 billion riyals ($50.7 billion) at the start of June to 137.7 billion riyals.

Trade initially suffered too.

Large container ships are unable to dock in Qatar’s shallow waters, so shipping lines must use intermediary hubs in deeper seas known as feeder ports to take and deliver goods and services.

Before the diplomatic row, the Emirati port of Jebel Ali served as Qatar’s feeder port. After the row, Qatar could no longer import or export from Jebel Ali. That was a big hit for a country that imports the vast majority of its consumable goods.   

However, the plan to cripple Qatar ultimately failed.

Quick Recovery

Large amounts of government funds and reserves enabled the government in Doha to support its economy while it absorbed the initial shock. In fact, the Qatari government spent approximately $38.5 billion to support the economy.

The central bank’s reserves and liquidity totaled $45.8 billion in May and took a nose dive in June and July. They have since started to recover and now total $36.1 billion.

Also vital to the country’s economic survival has been its sovereign wealth fund, which is worth $300 billion (of which $180 billion is liquid).

Qatar’s banking crisis has gotten better. Deposit outflows from Qatari banks have slowed. Liabilities to foreign banks have also declined. Public sector deposits and central bank injections helped mitigate liquidity issues. And banks continue to prioritize securing additional long-term funding for operations. 

Trade came back quickly too.

Qatar designated Oman’s Sohar port as its new feeder port and began to set up storage and logistics services there. Turkey and Iran also flew in food supplies. Meanwhile, Qatar established direct shipping routes with ports in India, Iran, Turkey, Oman, Kuwait, Pakistan, Malaysia, and Taiwan. Routes to North African countries like Tunisia and Morocco are expected soon.

Cause for Optimism

Though the action taken against Qatar may not have achieved what its authors had hoped it would, financial institutions such as the International Monetary Fund have warned that the dispute could undermine investor confidence in the GCC if it continues.

Qatar’s economy was slowing even before Saudi Arabia severed diplomatic ties, thanks in part to low energy prices. But non-oil sectors of Qatar’s economy—such as construction, manufacturing, agriculture, and services—are projected to grow by nearly 5% in 2017.

The expectation of higher oil prices in 2018 has only added to Doha’s optimism.

Recent agreements with the UK and France that are worth over $24 billion suggest that some countries maintain their business confidence in Qatar.

Qatar was able to withstand Saudi Arabia’s tactics. It had enough money to keep the economy afloat. It also appears to have successfully reoriented itself to accommodate the new reality.

Qatari Emir Al Thani’s recent comments on the state his country, then, come as no surprise: “Qatar's sovereignty is above all considerations. We want to resolve the rift but not at the expense of our sovereignty and dignity.” Doha has not compromised on its position because it has not had to.

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