Qatar assets pile up losses amid tension

Dubai

INVESTORS in Qatari stocks, bonds and currency forwards were unexpectedly saddled with losses last week as the country was thrust into the epicentre of an unprecedented spat with its neighbours.

The country's stock market shrank by about US$11 billion in value on Tuesday, the most since 2010, after Middle Eastern countries including Saudi Arabia and the United Arab Emirates cut ties with the Gulf nation. The country's most liquid bonds tumbled during the week as its sovereign rating was cut and bets against its currency surged. Contracts to protect against a potential default are now at a higher level than those of Peru and Slovenia.

While tensions between the country and Gulf Cooperation Council members aren't new, "nobody expected how tactical, decisive, straight forward, sharp and well planned" the isolation of Qatar happened this time, said Nabil Al Rantisi, the managing director of Abu Dhabi-based Mena Corp Financial Services, one of the biggest brokerages in the UAE.

Qatar's main benchmark finished the week down 7.1 per cent.

Yields on US$3.5 billion of 3.25 per cent sovereign notes due in 2026 climbed more than 40 basis points in the five days through Friday. S&P Global Ratings has lowered Qatar's long-term rating by one level to AA- and put it on negative watch. Moody's Investors Service also weighed in, saying the sovereign credit strength will be negatively impacted primarily on higher funding costs, while a pick-up in foreign investment outflows would drain foreign-exchange reserves, and weaken Qatar's external liquidity position.

The crisis put the Qatari currency, which is pegged at 3.64 per US dollar, under "unprecedented pressure", according to Chris Turner, the London-based global head of strategy at ING. If officials aren't able to maintain the riyal's peg, it "may be devalued by at least 20 per cent, although such a scenario isn't expected", because the government has resources to continue defending the currency, he added.

The cost of protecting Qatari dollar debt against default for five years using credit default swaps almost doubled during the week to 112, the highest this year.

Volatility will probably persist this week, as investors will be looking for indications that talks are happening between governments, said Mr Al Rantisi. BLOOMBERG