Qatar: Embargo causes extensive business disruption

05 July 2017

Qatar has rejected a series of demands made by Saudi Arabia, United Arab Emirates (UAE), Bahrain and Egypt in exchange for restored relations. This will lead to a period of prolonged isolation for Qatar. Qatar has extensive wealth reserves that will allow it to weather a lengthy embargo. However, the situation will weigh on Qatar’s growth outlook for 2017. There will be extensive business interruption for private companies, with the embargo elevating contractual agreement repudiation risks.

Security Environment

On 5 June 2017, Saudi Arabia, the UAE, Egypt and Bahrain severed relations with Qatar, followed later in the day by Yemen, the Maldives and Libya’s eastern-based government. All air and sea travel to and from Qatar was suspended and Qatari nationals were forced to return home. Participating countries cited Qatari sponsorship of terrorist organisations in their own territories as motivation.

However, the actions are also linked to Qatar’s independent foreign policy stance, in which it has maintained relations with Iran. On 22 June 2017, Saudi Arabia, UAE, Bahrain and Egypt issued 13 demands to Qatar, with a 10-day ultimatum, to restore ties. These included shutting down news network al-Jazeera, scaling back relations with Iran and ejecting Turkish troops from Qatar. Qatar rejected the demands, stating that they were unreasonable.

With Qatar’s rejection of the demands, a period of prolonged isolation, with closer links to Turkey and Iran, is increasingly likely. Military conflict is possible, although not likely without authorisation from the United States. If a military conflict were to occur, it would likely see Saudi and Emirati troops entering Qatar and capturing government buildings, airports, al-Jazeera offices and the palaces of senior officials. Qatar’s inferior military capabilities would prevent a sustained military conflict, with the Qatari royal family preferring to replace the current emir with a figure more amenable to Saudi-led policy positions.

Trading Environment

A prolonged period of severed relations would have a detrimental effect on the Qatari economy. Qatari exports to Saudi Arabia were around USD 896 million in 2015, and around 40% of Qatar’s non-oil imports cross the Saudi border. There were reports of panic buying of goods in Qatari supermarkets on 5 June 2017, and the country has since relied on food imports from Turkey and Iran. 

Moreover, the closure of land borders will prevent construction materials from entering Qatar, potentially delaying the completion of major projects. As a result, there are likely to be immediate inflationary pressures in the Qatari economy.

On the whole, a sustained cutting of ties will undermine Qatar’s economic growth rate, forecasted at 3.4% in 2017. Qatar has a significant sovereign wealth fund, estimated at USD 335 billion, that it can draw upon during a sustained embargo. However, over a prolonged period this will weaken economic fundamentals and may lead to a sovereign ratings downgrade; particularly if it is forced to increase financing of its fiscal deficit through borrowing as a result of disrupted trade and capital flows.

Investment Environment

Commercial operations in Qatar will face severe disruption for the duration of the diplomatic crisis. Port authorities in Saudi Arabia, the UAE and Bahrain have issued restrictions on ships moving to and from Qatar. This will cause significant disruption for shipping companies and oil product loadings. Shipping companies have had to swap cargos or stop at third ports unaffected by the actions to minimise disruption. However, this will raise costs and may lead to delays. Affected companies may also be unable to meet contractual obligations for the sale and transportation of goods.

The current embargo will exacerbate already elevated contract alteration risks, particularly in the construction sector. Qatari law allows clients or principal contractors to cease work prior to the completion of projects, on the condition that compensation is paid. However, contracts are often ambiguous, meaning that if work does stop firms can experience protracted disputes over fair compensation. ‘Pay-when-paid’ clauses can also mean that payment delays are passed through the supply chain.

Qatar: Embargo causes extensive business disruption

In this month's Risk Outlook, we also provide a detailed forward looking assessment of developments within the security, trading and investment environments for Brazil, Philippines, Saudi Arabia and Mozambique, all of which have been the subject of recent enquiries from JLT's client base.

Qatar: Embargo causes extensive business disruption

The monthly Risk Outlook is supported by JLT’s proprietary country risk rating tool, World Risk Review (WRR) which provides risk ratings across nine insurable perils for 197 countries. The country risk ratings are generated by a proprietary, algorithm-based modelling system incorporating over 200 international sources of data.

Download July Risk Outlook

For further information, please contact Ruth Lux, Senior Consultant on +44 (0)20 7886 5409 or email ruth_lux@jltgroup.com

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