GCC Unity Cracks

The Doha government faces pressure from Saudi Arabia, the UAE and others, threatening stability in a volatile region.

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The isolation of Qatar by its Arab neighbors, led by Saudi Arabia and the United Arab Emirates, has exposed deep rifts in the GCC alliance. Those rifts opened wider following the May visit to Riyadh by US President Donald Trump.

Trump’s public support for the actions against Qatar put additional pressure on Doha, according to a report by Marmore MENA Intelligence, a subsidiary of Kuwaiti investment bank Markaz. “If this diplomatic conflict intensifies, it can throw into question the GCC as a unified bloc,” the report says.

Kuwait’s emir, Sabah Al-Ahmad Al-Jaber Al-Sabah, who helped build the alliance, expressed dismay. “It is very difficult for us, the generation that established the GCC 34 years ago, to see some members engage in disputes that may lead to dire consequences,” he said, according to state news agency Kuna. As Global Finance went to press, Kuwait was trying to mediate the dispute. “At a time when the GCC is facing multiple challenges,” the Marmore report says, “the current diplomatic crisis threatens to divert critical energies.”

GCC-Qatar trade totals more than $10 billion annually. Given the close trade and geographical links with the rest of the GCC, especially Saudi Arabia and the UAE, the financial impact will worsen if the face-off continues for long, Marmore says. “Qatar’s ability to transport its exports through sea and air may become extremely difficult,” says the report. “Even if options are worked out through Iran, the additional cost of transportation and the risk premiums will reflect on Qatari export prices.”

Saudi Arabia, the UAE, Egypt and Bahrain, in severing diplomatic and transport ties with Doha on June 5, blamed Qatar for supporting Iran and financing terrorist groups opposed to Saudi Arabia and others in the region. “Tensions between Sunni- and Shia-supported governments in the region are by no means unprecedented,” says Jan Dehn, head of research at investment manager Ashmore, citing Saudi Arabia’s sending armed troops to Bahrain to quell an uprising of its Shia population in 2011.

“The potential fallout from all-out war between Shia- and Sunni-dominated countries in the region is enormous,” Dehn says. “Such a conflict would potentially extend far beyond the borders of the Arab Peninsula. Russia and Western countries would likely also be drawn into the conflict due to strong vested interests in the region.” He hopes the prospect of mutual assured destruction will incline all sides to de-escalate.

Moody’s Investors Service’s Dubai office notes that if the standoff drags on it will be “credit-negative” for Qatari banks, “owing to their reliance on confidence-sensitive foreign funding, which currently accounts for 35% of total liabilities.” The liquidity squeeze could intensify if tensions escalate further, possibly driven by restrictions on capital flows or change in investor sentiment, according to the agency. “The rift, the worst since the creation of the GCC in 1981, could also be negative for regional economies, business confidence and credit growth opportunities for GCC banks if it persists,” Moody’s says.

Over the past two years, deposits into local banks from the hydrocarbon-rich Qatari government and related entities have declined due to oil prices. Nonetheless, Moody’s expects the Qatari government to support the banks if needed to maintain confidence and stability. Qatar, the largest exporter of LNG, is one of the world’s wealthiest nations and has reserves equivalent to more than 250% of GDP. It is due to host the FIFA World Cup of soccer in 2022.