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A cashier counts Qatari riyal notes [Reuters]

Why the financial war on the Qatari Riyal has failed

WT24 Desk

“We know blockading countries and their agents are attempting to manipulate and undermine our currency, securities and derivatives, as part of a coordinated strategy to damage Qatar’s economy,” Qatar’s Central Bank Governor Sheikh Abdullah bin Saud Al Thani said in a statement on December 19, Agencies report.

“We will not stand by while our country is attacked in this manner,” he said, adding that the central bank had hired New York-based law firm Paul, Weiss, Rifkind, Wharton & Garrison LLP to lead the investigation.

In an interview with Reuters in November, Khalid Alkhater from Qatar’s central bank explained how some Arab states are trying to destabilise Qatar’s Riyal.

Alkhater was the architect of Qatar’s monetary policy in the 2008 global financial crisis, and is currently in Britain on leave from the central bank.

Illiquid bonds

  • Artificially low prices. Alkhater said part of the strategy to undermine the Riyal involved trading Qatar government bonds at artificially low prices to suggest the economy was in trouble.
  • This failed because the market in Qatari bonds was illiquid, so trading in high volumes was difficult, and because Qatar had taken precautionary steps, said Alkhater.
  • Email leaks. According to The Intercept, a plan for the UAE to weaken Qatar’s economy was found in the email account of Yousef-al-Otaiba, the UAE ambassador to the United States.
  • “[The outline] laid out a scheme to drive down the value of Qatar’s bonds and increase the cost of insuring them, with the ultimate goal of creating a currency crisis that would drain the country’s cash reserves,” The Intercept reported.

Gas reserves

  • Sell in Riyals. Alkhater said that Qatar, the world’s top liquefied natural gas (LNG) exporter, could consider taking payments for LNG exports in Riyals rather than dollars, which would create global demand for its currency.
  • No risk of devaluation. Most independent analysts think Qatar’s economy, with huge gas and financial reserves, can weather the storm and do not see any serious risk of a devaluation of the Riyal, whose dollar peg of 3.64 Riyals has been enshrined in law since 2001.
  • Central bank governor Sheikh Abdullah bin Saud Al Thani, in office since 2006, said last month that the government and the central bank could support the banking system with both state reserves and the holdings of Qatar’s sovereign wealth fund.

Offshore banks

  • Bank manipulation. Alkhater blamed low quotes for Qatar’s Riyal in the offshore market on some banks – which he said were from nations boycotting Qatar, without naming the institutions – seeking to manipulate the market by exchanging the currency at weaker levels than on the onshore market. He did not provide evidence.
  • According to The Intercept, a plan to weaken Qatar’s economy was prepared for the UAE by Banque Havilland, a Luxembourg-based bank. However, there is no conclusive evidence that the plan was indeed executed.
  • Offshore rate. The Riyal changed hands onshore last week very close to its official peg of 3.64 to the US dollar, but on November 21 it traded as low as 3.8950 offshore on the Reuters conversational dealing platform.
  • Effect on stock market. Equity index compiler MSCI cited this gap on November 22 when it said it might use offshore foreign exchange rates to value Qatar’s stock market, potentially changing the weighting of Qatari equities in MSCI’s emerging market index.
  • MSCI said it would take feedback from the investment community on the proposed currency shift until December 1, and would announce its final decision by December 5.
  • Qatar’s central bank responded by saying it would provide currency needs to all investors and was working with banks to ensure transactions could be conducted normally.

“Mutual destruction”

  • Oil prices. “It could spark contagion across a region which is tied to the US through dollar pegs, and which is already suffering from financial distress and economic difficulties due to low oil prices,” he said, calling attacks on Qatar’s Riyal “a weapon of mutual destruction”.
  • Bahrain’s currency. Any increase of pressure on the currency of Bahrain, whose debt is rated junk, could cause Manama to seek support from Saudi Arabia, whose own economy is battling a big state budget deficit due to three years of weak oil prices, Alkhater said.
  • WTO litigation. On November 22, Qatar opened dispute proceedings against the UAE at the World Trade Organization.
  • Forcing self-sufficiency. He added that the boycott was forcing Qatar to be more self-sufficient in agriculture, food processing and light manufacturing, accelerating a long-term goal to diversify the economy. “Now Qatar has to expedite it out of necessity.”

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