Qatar Is Running Out Of Dollars

While the Saudi-led campaign to starve Qatar"s citizens may end up short of the target, with both Turkey and Iran volunteering to provide needed staples to the isolated Gulf nation while local entrepreneurs have started a cow paradropping campaign to offset the decline in milk imports, a more pressing problem has emerged: Qatar"s financial system is running out of dollars. As Bloomberg reports, several Qatari banks have boosted interest rates on dollar deposits to shore up liquidity as the Saudi-led campaign to isolate the gas-rich Arab state intensifies.

To boost their hard currency reserves, Qatar banks are now offering a premium of as much as 100 basis points over LIBOR to attract dollars from regional banks, some 80 bps higher compared to the rate they offered prior to last week"s crisis. A similar picture is visible on the 3-Month QIBOR, or Qatar Interbank Rate, which has surged to 2.3% as of Tuesday.

According to the central bank, at the end of April, Qatar"s banks held 21.4% of their customer deposits in foreign currency. Non-resident deposits made up 24% of the overall deposits of 781 billion riyals ($213 billion). A separate estimate from SICO Bahrain, Qatari banks have around 60 billion riyals ($16.5 billion) in funding in the form of customer and interbank deposits from other Gulf states. Most of this could eventually be withdrawn if the crisis continues.

Adding to concerns of a monetary blockade, Bloomberg also reports that some banks in neighboring countries have been cutting their exposure to Qatar amid concerns of a widening of the blockade.

In a Tuesday report, Capital Economics" Jason Tuvey wrote that while banks are unlikely “to be thrust into a crisis,” borrowing costs “look set to rise and banks are likely to become more cautious with their lending,”  “If local banks struggle to rollover their external debts, they could be forced to shrink their balance sheets and tighten credit conditions." For now the local central bank has said that Qatar"s banking system is functioning without disruption, although market indicators suggest liquidity stress is rising. Likewise, Qatar National Bank, the biggest lender in the Middle East, said it didn’t see any “significant” rate increases since the standoff began, according to statement emailed to Bloomberg on Tuesday.

The good news for Qatar - the world"s wealthiest nation on a GDP/capita basis - is that it has enough financial firepower to withstand a prolonged financial siege, and defend its currency and economy, Finance Minister Ali Shareef Al Emadi told CNBC in an interview broadcast Monday. Al Emadi played down the impact of the crisis on the country, saying the plunge in Qatari assets last week was a “normal” reaction to the standoff.

While so far there has been no suggestion that Qatar would commence liquidating its reserves, investors have already begun selling Qatari assets and speculating against the riyal, concerned how long Qatar can weather the crisis without having to devalue its currency or sell any of its global holdings. Qatar’s 12-month riyal forwards closed at 588 basis points against the dollar on Monday, the highest level since at least 2001, according to data compiled by Bloomberg. Rates eased slightly to about 500 basis points on Tuesday.

Despite the spike in interbank rates, S&P is confident that Qatari banks are strong enough to survive the pullout of all Gulf money and then some. The ratings agency ran two hypothetical scenarios of capital flight, and concluded that Qatar’s lenders could survive the withdrawal of all Gulf deposits plus a quarter of the remaining foreign funds the banks keep. Still, that did not prevent S&P from lowering Qatar’s long-term rating by one level to AA- last week.

Separately, Reuters reports, that the dollar shortage has also spread over to money exchange houses in Qatar on Sunday, making it harder for worried foreign workers to send money home.  

"We have no dollars because there is no shipment or transportation from the United Arab Emirates. There is no stock," said a dealer at the Qatar-UAE Exchange House in Doha"s City Center mall. "The shipment is blocked from the UAE" the dealer added, although it was not quite clear if it was physical cash that was being transported.

Other exchange houses in Doha also told Reuters they had no supplies of dollars. At Qatar-UAE Exchange, dozens of people - some of the foreigners who comprise nearly 90 percent of the population of 2.6 million - waited quietly in line to change money or make remittances to their home countries.

"I spoke with my wife this morning. She said, "Send your savings to me now." I am not panicked but my family are scared," said John Vincent, an air-conditioning repairman from the Philippines.

"I sent 2,000 riyals ($550) home but I have some more savings left here in Qatar. I will see what the situation is in coming days before I decide what to do."

Sudhir Kumar Shetty, president of UAE Exchange, which has eight branches in Qatar, said his firm was continuing to handle remittances and currency buying as usual in that country. He said the firm hadn"t seen any major change in remittance volumes due to the diplomatic tension.

But he added that dollar supply was not meeting demand in Qatar and attributed this partly to flows of the U.S. currency from other Gulf countries being disrupted.

"Everywhere, all the banks and exchange houses, there are no dollars. All the exchange houses are trying to get currencies from other countries," the dealer at Qatar-UAE Exchange said, adding that his firm was hoping for a shipment from Hong Kong.

For now most Western banks with a presence in Qatar have continued business as normal, partly because they did not want to lose out on billions of dollars of building projects which Qatar plans before it hosts the soccer World Cup in 2022.  But other Western banks have halted new Qatar business including interbank and syndicated lending, while continuing to service existing business, banking sources said, declining to be named because of political sensitivities.

"Everybody is shocked - they"re not worried about Qatar"s credit, they"re worried about compliance and the risk that the local sanctions could be escalated to an international level," said one foreign banker in the region.

In a worst case scenario, bankers expect Qatari banks to borrow from the central bank"s repo facility if they become short of funds. However, central bank rules limit the size of the repos to 2% of each bank"s private sector deposits. Bankers speculate the central bank may lift this cap although the central bank did not respond to Reuters requests for comment.

To Bypass Food Embargo, Qatar Will Pay $8 Million To Airlift 4,000 Cows

Yesterday we reported that as the Qatar crisis continues with no resolution in sight, in an act of generosity toward its distressed Gulf neighbor, Iran dispatched four cargo planes of food to Qatar and plans to provide 100 tonnes of fruit and vegetable every day. Qatar has also been holding talks with Iran and Turkey to secure food and water supplies after Saudi Arabia, the United Arab Emirates, Egypt and Bahrain cut links, accusing Doha of supporting terrorism.

However, any stopgap measures implemented so far are not nearly enough to compensate for all the food imports lost as a result of the gulf blockade. So, for the nation with the highest GDP/capita in the world, where money is largely not an object, an ingenious solution has emerged.

Call it the biggest bovine airlift in history, as Bloomberg puts it. Because while the "showdown between Qatar and its neighbors has disrupted trade, split families and threatened to alter long-standing geopolitical alliances", it has prompted one enterprising Qatari businessman to fly 4,000 cows to the Gulf desert in an act of resistance and opportunity to fill the void left by a collapse in the supply of fresh milk.

The reason for the dramatic "solution" to the millk embargo is that most of Qatar"s fresh milk and dairy products, meant for Doha’s more than 1 million residents, came from Saudi Arabia up until a week ago. That supply was cut off after the kingdom and its allies cut transport links with "a country that spends $500 million a week to prepare stadiums and a metro before the soccer World Cup in 2022."

According to Bloomberg"s calculations, it will take as many as 60 flights for Qatar Airways to deliver the 590-kilogram beasts that Moutaz Al Khayyat, chairman of Power International Holding, bought in Australia and the U.S. “This is the time to work for Qatar,” he said. In addition to the abovementioned airlifted Turkish dairy goods and Iranian fruit and vegetables, there’s also a campaign to buy home-grown produce. Signs with colors of the Qatari flag have been placed next to dairy products in stores. One sign dangling from the ceiling said: “Together for the support of local products.”

“Our government has made sure we have no shortages and we are grateful for that. We have no fear. No one will die of hunger.”

“It’s a message of defiance, that we don’t need others,” said Umm Issa, 40, a government employee perusing the shelves of a supermarket before taking a carton of Turkish milk to try.

Only you do, and those who provide the much needed milk will get even richer than they already are.

For Al Khayaat, whose main business is a construction firm that built Qatar’s biggest mall, the cow-a-drop may be a slam dunk business decision. He has been expanding the company"s agricultural business at a farm 50 kilometers north of Doha. Food security is part of Qatar’s government strategy to steer the economy away from petrodollars, known, like in Saudi Arabia, as “Vision 2030.” And what better way to aggressively grow that business than at a time when it is your countrymen"s patriotic duty to buy your goods.

On a site covering the equivalent of almost 70 soccer fields, new grey sheds line two strips of verdant grass in the desert with a road running through the middle up to a small mosque. It produces sheep milk and meat and there were already plans to import the cows by sea. Then Qatar was ostracized, so the project was expedited.

Fresh milk production will start by the end of the month rather than September and will eventually cover a third of Qatar’s demand by mid-July, Al Khayyat told Bloomberg at his office in Doha. Facilities for the Holstein cows are ready, though the company will take a hit on the shipping cost for the animals, which increased more than five times to $8 million.

Which amounts to $2,000 per cow. At that price, it was not immediately clear if the cows would fly business or first class.