The diplomatic dispute between Qatar and the Saudi-led group of countries is credit negative for all GCC members, with Qatar and Bahrain the most exposed, US ratings agency Moody’s Investors Service said in a report published today.

“The severity of the diplomatic dispute between the Gulf countries is unprecedented, which magnifies the uncertainty over the ultimate economic, fiscal and social impact on the GCC as a whole,” says Steffen Dyck, vice-president and senior credit officer at Moody’s. “While we expect the GCC to overcome its divisions, tensions persisting, or even escalating, would be the most credit negative for Qatar and Bahrain.”

It is now more than three months since Saudi Arabia, the UAE, Egypt and Bahrain severed ties with Doha.

Moody’s says Qatar faces large economic, financial and social costs stemming from related travel and trade restrictions, and its future credit trajectory will depend heavily on the evolution of the dispute.

The ratings agency says the impact to date has been most acute for the trade, tourism and banking sectors. The cost of importing food and medicine has increased 10-fold, while visitor numbers were down 40 per cent year-on-year in June.

About $30bn in capital left Qatar’s banking system in June and July, draining foreign exchange reserves, and further declines are expected as GCC banks opt not to roll over their deposits. Moody’s says non-resident deposits currently stand at $43.2bn, or 20 per cent of total deposits.

Qatar Central Bank has been supporting bank funding: Moody’s estimates Doha used $38.5bn (equivalent to 23 per cent of GDP) of its $340bn of financial reserves to support the economy in the two first months of the sanctions. However, it does not expect Doha to raise funds in the international capital markets this year, which should cushion the country against higher funding costs for the time being. In July, Moody’s assigned a negative outlook to Qatar’s sovereign rating.

Moody’s says Bahrain is most exposed to an escalation in tensions. Rising debt, increased issuance from other GCC sovereigns and rising US interest rates have put pressure on Bahrain’s financing costs since 2014, making it vulnerable to any reassessment of risk by foreign investors. It estimates Manama’s total borrowing requirements in 2017 at about 40 per cent of GDP. Government bond yields are up 20 basis points since the crisis began, having initially spiked by 40 basis points.

Moody’s believes a break-up of the GCC or a realignment through the exclusion of Qatar is unlikely, given the stance of Kuwait and Oman in the dispute.