Moody's: Diplomatic row is credit negative for all GCC members; Qatar and Bahrain most exposed

The diplomatic dispute between Qatar and a group of neighbouring countries, including members of the Gulf Cooperation Council (GCC), is credit negative for all GCC countries, with Qatar and Bahrain being most exposed, Moody's Investors Service said in a report today.

The report, "Sovereigns -- Gulf Cooperation Council: Drawn-out standoff would be credit negative for all GCC members, but Qatar, Bahrain most at risk", is now available on www.moodys.com. Moody's subscribers can access this report via the link at the end of this press release. The research is an update to the markets and does not constitute a rating action.

"The severity of the diplomatic dispute between Gulf countries is unprecedented, which magnifies the uncertainty over the ultimate economic, fiscal and social impact on the GCC as a whole," said Steffen Dyck, Moody's Vice President -- Senior Credit Officer and co-author of the report. "While we expect the GCC to overcome its divisions, tensions persisting -- or even escalating -- would be the most credit negative for Qatar and Bahrain."

More than three months since the diplomatic row began, Qatar faces large economic, financial and social costs stemming from related travel and trade restrictions. Qatar's future credit trajectory will depend heavily on the evolution of the dispute.

The impact to-date has been most acute for the trade, tourism and banking sectors. Sizable capital outflows in the vicinity of $30 billion flowed out of Qatar's banking system in June and July, with further declines expected as GCC banks opt not to roll over their deposits. Qatar Central Bank has been supporting bank funding: Moody's estimates Qatar used $38.5 billion (equivalent to 23% of GDP) to support the economy in the two first months of the sanctions.

Although negative foreign investor sentiment has also increased Qatar's financing costs and led to capital outflows, Moody's does not expect Qatar to raise funds in the international capital markets this year. This should cushion Qatar against higher funding costs for the time being.

Among Qatar's GCC critics, Bahrain is most exposed to an escalation of regional tension. Rising debt, increased issuance from other GCC sovereigns, and rising US interest rates have put pressure on Bahrain's financing costs since 2014.

The broad-based deterioration of Bahrain's credit profile and its diminished shock absorption capacity makes it susceptible to any reassessment of risk by foreign investors. The country's strong alliance with Saudi Arabia and the United Arab Emirates, which have provided support in the past, mitigates this risk to some extent. However, the form and timeliness of such support lacks clarity.

The direct exposure of Bahrain, Saudi Arabia and the UAE's banking systems to a coordinated withdrawal of cross-border deposits and loans by Qatari banks and other institutions is modest.

The tensions highlight intra-GCC divisions, and although Moody's believes that a realignment within the GCC is unlikely, the diplomatic rift will inevitably impair the functioning of the grouping, the more so the longer it persists.