Posted on December 07, 2017

A peaceful resolution to the GCC-Qatar crisis is most likely, but de-escalation is likely only gradually. Risk of further escalation remains but appears unlikely as the crisis remains deadlocked. The GCC December Heads of State meeting is likely to be delayed in consequence. With financial outflows slowing down, we expect the sovereign to come tap the market and replenish its foreign assets.

BofA Merrill Lynch Sovereign [].jpgThe large FX mismatch in the Qatari banking sector keeps it vulnerable to an abrupt withdrawal of GCC funding. We estimate US$35bn (20% of GDP) in banking sector capital outflows within one year if the GCC decides to sever financial ties. QIA's foreign assets allow it to withstand outflows. Prolonged outflows could erode its balance sheet and severely pressure the USD peg. The potential GCC claims on the Qatari banking sector (US$35bn) represent a large 50-70% share of the core QIA liquid foreign assets.

Financial outflows are slowing but Qatar remains vulnerable to a confidence shock. The market is mis-interpreting the ability of the Qatar Central Bank (QCB) to deploy the additional foreign currency liquidity it has recently unveiled, in our view. We believe these represent FX assets that the QCB has deployed already into the domestic banking sector. As a reminder, accumulated current account surpluses excluding pension and central bank assets, an assumed 3% rate of return and cUS$60bn in seed capital, would place QIA assets at cUS$350bn. Excluding an estimated US$100bn in domestic assets, US$60bn in listed strategic foreign stocks, US$75bn in real estate would thus leave QIA assets at US$115bn (70% of GDP). Excluding domestic assets and real estate, we believe that two-thirds of the portfolio could be private equity. So listed liquid assets could be around US$50-70bn. (This would include the strategic holdings as there are press reports of QIA reducing these holdings recently). Apart from margin loans on specific deals and investments, QIA's leverage could be mainly real estate non-recourse loans, so this should not impact unduly on AUMs.

We maintain a Marketweight stance on Qatar EXD after the GCC-Qatar crisis led to a widening in bond spreads.