Alone in the Gulf, Qatar’s Currency Escapes Devaluation Bets
Only Currency to Dodge Gulf Market’s Ire Shows Payoff After Rift
(Bloomberg) --
Three years after being isolated by its Gulf Arab neighbors, Qatar also stands apart in the currency market.
Its peg against the dollar has been the only one in the region that hasn’t come under pressure even as local economies succumb to what may be their worst recession ever. The nation’s bonds have also outperformed those of the other five members of the Gulf Cooperation Council this year.
Qatar has bulked up its fiscal defenses and grown more self-sufficient after four Arab states led by Saudi Arabia severed diplomatic and trade ties over accusations that it supported terrorist groups -- allegations the emirate denies.
The world’s biggest exporter of liquefied natural gas, due to host the 2022 soccer World Cup, has since rebuilt its reserves and brought the oil price it needs to balance this year’s budget to just under $40 per barrel, the lowest in the region. S&P Global Ratings projects the size of the government’s liquid financial assets will average about 177% of gross domestic product from 2021 through 2023.
“Investors will always be drawn to the key credit strength, namely the strong external balance sheet,” said Mohammed Elmi, a London-based emerging-market portfolio manager at Federated Hermes, which manages $606 billion.
Derivatives traders are wagering on a resilient Qatari riyal even as other currencies in the region have felt the strain from the one-two punch of lower oil prices and the coronavirus pandemic.
One-year forwards -- used by traders to speculate whether Qatar may adjust its long-held peg of 3.64 riyals to the dollar or hedge, in case it does -- was at a discount of 41 points in the offshore market at the end of last week, compared with a premium of as high as 725 after the dispute erupted.
By comparison, while traders have grown more confident that other Gulf countries will be able to maintain their currency pegs following crude’s recent rally, their 12-month forwards remain at a premium.
‘Sovereign Strength’
“Economic weakness is cyclical and can rebound; sovereign strength needs to be built up over many years and is structural,” said Ehsan Khoman, head of Middle Eastern research at MUFG Bank in Dubai. “Structurally is where I feel investors and credit rating agencies are comfortable with the story.”
Qatar, which has the fourth-highest rating from the three major credit assessors, is on track to run the smallest budget deficit in the GCC this year.
The highest income level among all sovereigns rated by S&P, alongside Qatar’s government and external balance sheets will serve as a strong buffer in the event of economic and financial shocks, and could mitigate the impact of weak growth.
The regional rift will remain a source of uncertainty. Efforts by Kuwait and the U.S. to get the former allies to mend ties have failed, as Qatar and the Saudi-led group stand their ground.
Qatar raised $10 billion from a Eurobond that attracted around $45 billion of orders this year. The yield on the $5 billion debt due 2050 reached an all-time low of 3.28% last week, compared with 4.03% when it started trading in April.
“As a small country, Qatar’s resources go farther,” said Richard Segal, a senior analyst at Manulife Investment Management in London. “There’s a recognition that if Saudi Arabia starts another fight with Qatar, Qatar will not lose.”
©2020 Bloomberg L.P.