Standard & Poor’s downgraded Qatar’s debt on Wednesday as the riyal currency fell to an 11-year low amid signs that portfolio investment funds were flowing out of the country because of Doha’s diplomatic rift with other Arab states.
S&P cut its long-term rating of Qatar by one notch to AA- from AA and put the rating on CreditWatch with negative implications, meaning there was a significant chance of a further downgrade.
The rating agency said Qatar’s economy would suffer from the decision on Monday of Saudi Arabia, the United Arab Emirates, Egypt and Bahrain to cut diplomatic and transport ties with Doha.
“We expect that economic growth will slow, not just through reduced regional trade, but as corporate profitability is damaged because regional demand is cut off, investment is hampered, and investment confidence wanes,” S&P said.
Another major rating agency, Moody’s Investors Service, assesses Qatar at Aa3, which is equal to S&P’s new rating. Fitch Ratings puts Qatar at AA.
The US dollar was bid as high as 3.6526 riyals in the spot market on Wednesday, its highest level since July 2005, according to Thomson Reuters data. The riyal is pegged at 3.64 to the dollar by the central bank, which only allows small fluctuations around this level.
In the offshore forwards market, which banks use to hedge against the risk of future moves in the spot rate, the riyal dropped as far as a 550-point premium against the dollar, its lowest level since December 2015.
The low in the forwards market only implied the riyal would depreciate about 1.5 percent in the next 12 months. But it showed there were expectations of substantial outflows of money from Qatar in coming months.
Qatar’s stock index has tumbled 9.7 percent over the past three days, with high trading volumes suggesting some Gulf and international investors were bailing out of the market and sending their money home.
As S&P noted, Qatar’s banking system has in recent years become more dependent on loans and deposits from Gulf and international banks, and it could face a major outflow if that money is withdrawn because of diplomatic tensions.
The foreign liabilities of Qatari banks ballooned to 451 billion riyals ($124 billion) in March from 310 billion riyals at the end of 2015, central bank data shows.
Qatar debt rating downgraded by S&P as riyal hits 11-year low