Moody’s Investors Service has changed Qatar’s outlook from stable to negative due to the economic and financial risks arising from the ongoing political crisis between Qatar and the group of Saudi Arabia, UAE, Bahrain and Egypt.

“The likelihood of a prolonged period of uncertainty extending into 2018 has increased and a quick resolution of the dispute is unlikely over the next few months, which carries the risk that Qatar’s sovereign credit fundamentals could be negatively affected,” Moody’s said in a statement.

The US rating agency, however, has affirmed the long-term issuer and senior unsecured debt ratings of Qatar, the world’s biggest exporter of liquefied natural gas (LNG), at Aa3, taking into account the strengths embedded in Qatar’s credit profile. Moody’s argued that the net asset position of the government and exceptionally high levels of wealth will continue to provide significant support to the sovereign credit profile “for the time being”.

Qatar is engaged in a diplomatic spat with Arab states that have accused it of funding terrorism and destabilising the region. The Gulf monarchies including Saudi Arabia, the UAE, Bahrain and their allies Egypt, Libya, and Yemen moved to cut diplomatic, as well as trade and transport links, with Qatar on 5 June. The economic measures imposed include closing of land border with Saudi Arabia and a blockade of sea and air access and the expulsion of Qatari officials, residents and visitors.

The bloc of four countries has jointly named 12 entities and 59 individuals that are funding or supporting terrorists or terrorist organisations, and has presented a list of demands to Qatar which includes shutting down Doha-based Aljazeera TV, reducing ties with Iran and shutting down a Turkish military base in Qatar.

Qatar has denied the allegations. Its foreign minister, Sheikh Mohammed bin Abdulrahman al-Thani, this week delivered a letter to officials in Kuwait, which is acting as a mediator in the political crisis. Qatar was given initial deadline to respond by 3 July, which was later extended by 48 hours on Kuwait’s request, according to reports.

Al-Thani had rejected the demands by Saudi-led bloc, and later said that his country was ready to engage in dialogue under the right conditions.

It is not known what Qatar’s response has been to demands made by GCC peers, but rating agencies and analysts fear a rejection by Qatar, could mean a prolonged political crisis in the Gulf region, which could entail further economic sanctions against Qatar.

“Public exchanges between the various parties in recent weeks and previous periods of heightened tensions between Qatar and other GCC countries suggest that a quick resolution is unlikely and that the stalemate may continue for some time,” according to Moody’s statement, which added that depending on the duration and potential further escalation of tensions, the dispute could negatively affect Qatar’s economic and fiscal strengths.

A prolonged period of uncertainty will also negatively impact business and foreign investor sentiment and could weigh on Qatar government’s long-term diversification plans to position the country as a hub for air traffic, tourism, medical services, education, and sports through a higher risk perception among foreign investors.

“Weaker economic activity could also lead to deteriorating asset quality in the banking system and together with an escalation involving sanctions against the financial sector could necessitate a step-up in government liquidity support,” Moody’s states. The ratings agency adding that such sanctions have yet to be applied, and activities in the banking system have started to recover following a few days of volatility following the initiation of the economic blockade last month.

Moody’s ratings action follows a downgrade by S&P Global Ratings, which in June cut Qatar’s long-term credit rating and placed it on negative watch. Fitch Ratings, in the second week of June, placed Qatar’s ‘AA’ long-term foreign and local currency Issuer Default Ratings (IDRs) on Rating Watch Negative (RWN).

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