The Qatari riyal fell to its weakest level in almost two decades on Friday morning, straining the central bank’s currency peg as the government’s diplomatic rift with its Gulf neighbours – described by ratings agency Moody’s as “the worst since the creation of the Gulf Cooperation Council in 1981″ – entered its fourth day.
Saudi Arabia and three other Arab states cut diplomatic ties with Qatar on Monday in protest at its alleged support for extremist groups and soft approach to Iran. Turkey provided backing to Qatar on Wednesday, while US president Donald Trump called for a negotiated solution after initially criticising Qatar.
Qatar’s central bank generally keeps the riyal fixed in an extremely narrow range around QR3.64 per dollar, but its commitment to the peg has been tested since the start of the week.
The de facto embargo imposed on Doha has already prompted fears about the potential economic impact on the oil-rich state, which sources around a quarter of all its food and basic goods imports from Saudi Arabia and the UAE, as well as essential materials needed for projects such as construction for the 2022 World Cup.
Investors have speculated that a prolonged dispute would cause government revenues to fall and encourage foreign investors to pull assets out of the country, making it harder for the bank to shore up the riyal.
The currency hit a low of 3.6575 per dollar on Thursday morning, its weakest level since March 1998, and 0.44 per cent weaker than last Friday (when it was already at the weaker end of its normal range).
Futures contracts suggest some investors are expecting more severe devaluation to come. 12-month forward points – which are used to determine prices to exchange riyals for dollars in a year’s time – fell back on Wednesday after briefly hitting their highest level since at least 1988.
However, they rose again on Thursday to 525 by publication time, up 75 per cent from yesterday’s closing level. The forward points imply traders would have to pay QR3.71 per dollar to secure delivery in 12 months.
Chris Turner, global head of strategy at ING, said the pressure on the riyal was “unprecedented”. Previous speculative attacks on gulf currency pegs have proved to be temporary, but they have generally been motivated by external economic factors such as weak oil prices, and Mr Turner said “the fact that the current pressure is political and triggered by fellow GCC members is alarming”.
He said the strategic importance of Qatar – which hosts a US air base – means the conflict is likely to be “resolved calmly and peacefully over coming weeks”, but predicted pressure will remain on the peg “until such time that Qatar delivers some concrete signals to appease its accusers”.
Reuters reported this morning that the central bank had asked local banks to provide it with more detailed than usual information on foreign exchange trading and money transfers as it attempts to keep track of pressures on the financial system.
Ratings agency Moody’s warned about the potential impact of the dispute on both the government and banking sector in a pair of updates on Thursday morning, following on from earlier warnings from Fitch and a credit downgrade from S&P.
Analysts Steffen Dyck and Malgorzata Glowacka said that while the “initial financial market reaction has been relatively manageable”, but said a prolonged dispute “would potentially have a more marked financial effect”.
Multiple analysts have pointed to Doha’s significant reserves of foreign currency and other assets which it can draw on to support the currency and other aspects of the market. Moody’s agreed that Qatar’s financial buffers are “relatively strong”, but it highlighted the fact that many of its assets are illiquid, meaning “a pick-up in foreign investment outflows would drain foreign-exchange reserves from their current level of $34.8bn”.