S&P Global Ratings has cut Qatar’s long-term credit rating and has placed it on negative watch on concerns that a long-drawn political conflict, the severing of the diplomatic ties with its GCC peers, and an economic blockade could potentially weaken Qatar’s financial strength.

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

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. The measures imposed include a blockade of land, sea, and air access and the expulsion of Qatari officials, residents, and visitors from the group of states.

“This will exacerbate Qatar’s external vulnerabilities and could put pressure on its economic growth and fiscal metrics,” S&P said in the statement, adding that “there are numerous uncertainties regarding Qatar’s response, the extent to which these measures will be imposed, and their longevity”. The rating agency said it will evaluate the situation and the potential impact on its projections for Qatar in its August review as further details emerge.

The lowering of its credit rating will add to the Qatar’s troubles, which is being accused by the Gulf states of meddling in their affairs and supporting terrorism. S&P said it understands that the moves against Qatar are “motivated by Qatar’s apparently more conciliatory stance toward Iran”, however Qatari authorities vigorously deny these allegations and Qatar’s exact policy response is uncertain at the moment.

The rating is supported by Qatar’s position as the top liquefied natural gas export with the third-largest proven natural gas reserves in the world, which can provide many decades of production at the current levels. The hydrocarbon sector contributes about 50 per cent of Qatar’s GDP, 90 per cent of government revenues and 85 per cent of the country’s exports.

On the banking and finance side, non-resident deposits in the system have increased over 2016 by 17 per cent of GDP, which has weakened the country’s external liquidity position as related external short-term obligations have increased; the average maturity of these deposits is under one year.

Over the same period, bank credit directly to the government has risen by a similar amount, and the funds were generally used to finance Qatar’s ongoing infrastructure programme. “This dynamic has therefore increased pressure on our external stock metric – narrow net external debt –, as the increase in external liabilities was not matched by external liquid assets. While we no longer expect the continued accumulation of these external liabilities, in our opinion recent events have the potential to destabilize these non-resident deposits and provoke an outflow,” S&P noted.

Although, this potential outflow does not pose immediate and significant issues for Qatar’s banks, it could mean that government support would be needed in some form to offset any potential major outflow, including the potential use of its sovereign wealth fund Qatar Investment Authority’s assets and the central bank’s contingency reserves.

“We now consider risks to external financing lines to the whole economy, including foreign direct investment, portfolio flows and to the financial sector to be elevated, and this could lead to pressure on Qatar’s pegged monetary arrangement,” according to S&P.