Qatar's banks face a deteriorating situation as blockade continues, Moody's says

Key Points
  • Moody's Investors Service cut the outlook for Qatar's banking system to negative from stable on Tuesday
  • Qatar has faced a two-month economic embargo imposed by other Gulf Cooperation Council members

Moody's Investors Service cut the outlook for Qatar's banking system to negative from stable on Tuesday amid a continuing blockade of the country by its neighbors.

Qatar has faced a two-month-long economic embargo imposed by a group of fellow Gulf Cooperation Council countries, including Saudi Arabia.

The Saudi-led group has presented Qatar with a list of demands, including shutting down the Al-Jazeera news network, the closure of a Turkish base and a downgrade of its relations with Iran. Qatar has refused.

Moody's pointed to weaker operating conditions and continued funding pressures for Qatar's banks.

"A prolonged regional dispute could trigger some outflows of foreign deposits and other external funding," Moody's said in a press release, noting that those funds accounted for around 36 percent of total system liabilities as of May.

Those potential outflows would reduce Qatari banks' liquidity buffers, with domestic deposits currently tight amid lower oil revenues, the ratings agency said.

Moody's said it was concerned about the banks' ability to access external funding.

The Doha Skyline at the Sheraton Grand Hotel on November 17, 2016 in Doha, Qatar.
Photo by Mark Runnacles | Getty Images

"Qatari banks' reliance on confidence-sensitive external funding has increased in recent years due to a significant decline in oil-related revenues" Nitish Bhojnagarwala, vice president at Moody's, said in a statement. "This leaves them vulnerable to shifts in investor sentiment."

The ratings agency said it expected Qatar's gross domestic product growth would slow to 2.4 percent this year, down from around 13.3 percent over the 2006 to 2014 period, but it added that it was the fastest within the Gulf Cooperation Council amid government spending on construction related to hosting the FIFA World Cup in 2022.

Moody's said the slowing economy would weigh on credit growth and asset quality.

"The gradual economic slowdown, combined with Qatar's ongoing dispute with some neighboring countries and continued challenges in the construction and contracting sector, will lead asset quality to dip slightly," it said.

It estimated system-wide problem loans would rise to 2.2 percent of gross loans by 2018, compared with 1.7 percent as of the end of last year.