US-based Fitch Ratings has placed Qatar’s ‘AA’ long-term foreign and local currency Issuer Default Ratings (IDRs) on Rating Watch Negative (RWN) as a result of the uncertainty caused by the by the cutting of diplomatic and logistical ties by three fellow GCC states and other Arab countries.

The ratings agency has also placed the short-term and local currency IDRs of ‘F1+’ and the ‘AA’ issue ratings of Qatar’s long-term foreign currency senior unsecured bonds on RWN. Fitch has maintained Qatar’s country ceiling at ‘AA+’.

Saudi Arabia, the UAE, Bahrain and Egypt have severed diplomatic and logistical ties with Qatar, which has included banning all transport between themselves and the ostracised state. According to Fitch, while Qatar has significant government accounts to cover the cost of securing imports from other markets in the short term, it could potentially have a significant economic impact.

While logistical and diplomatic blockade has been severe, Fitch says that the countries involved have so far only implemented limited restrictions on financial flows to Qatar. In its latest brief on Qatar, the ratings agency said that the country’s vast central bank reserves and significant assets in sovereign wealth fund Qatar Investment Authority (QIA) would be able to contain any short-term strains on the economy caused by an outright ban on financial relations between the Arab states involved and Qatar.

However, if financial restrictions were introduced and sustained for a longer period, the implications for Qatar’s business environment and economy would be “more serious,” according to Fitch.

The ratings agency says that Qatar’s drive for economic diversification has focused on positioning the country as a regional hub and destination for businesses and tourists, and a prolonged period of isolation could result in Qatar companies, including state owned entities, requiring significant bailouts. A long period of economic isolation could also have a major impact on public finances, according to Fitch.

Fitch’s decision to place Qatar on Rating Watch Negative is also due to the potential, although “remote”, possibility of military force. Moreover, a the ratings agency states that a long period of isolation could also lead to strains within Qatar between those advocating reconciliation with Saudi Arabia, and others favouring a more independent position, which could have an impact on political stability in the country.

Fitch has given Qatar an ‘AA’ rating due to its substantial sovereign assets, large hydrocarbon resources and the fact it has one of the world’s highest GDP per capita ratios. Qatar’s weaknesses are the country’s overdependence on hydrocarbon revenues and a higher external government debt level than other Gulf countries.

Fitch’s decision to place Qatar on negative watch comes days after S&P Global Ratings cut Qatar’s long-term credit rating.

The long-term rating was lowered a notch to ‘AA-’ from ‘AA’, but the Gulf state’s short-term rating was affirmed at ‘A-1+’ and the transfer and convertibility assessment was rated at ‘AA’, according to a S&P rating press release.