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GCC: Aon Risk Map outlines potential sources of greater instability

Source: Middle East Insurance Review | Jun 2018

The ongoing blockade of Qatar, unrest in the Qatif region in Saudi Arabia and continued intervention in the Yemeni civil war are all potential sources of greater instability if progress toward resolutions are not made, said the Terrorism & Political Violence Map 2018 co-produced by Aon and The Risk Advisory Group.
 
   If a binding settlement to the blockade cannot be reached, existing rifts between members of the GCC may be exacerbated, potentially irreversibly, the report said.
 
   In June 2017, several countries abruptly cut diplomatic ties with Qatar as Saudi Arabia raised concerns of Qatari support for terrorism. Air and sea routes into the peninsula were completely shut off and Qatar found itself isolated from the rest of the region amid trade and travel bans.
The blockade is the result of an escalation of the Qatar-Saudi conflict, but the report said overall risk remains at medium-low levels for Qatar as the economy stays strong and there is still space to mitigate the impact of the sanctions.
 
   Despite the external headwinds, Qatar’s growth has remained strong (and above the regional average), recovering from reduced yearly GDP growth of 0.6% in 3Q17 to 1.9% in 4Q17. This strong recovery is likely because the blockading countries account for less than 10% of Qatar’s total exports and its exports to major trading partners (Japan, South Korea, India and China) were largely unaffected. 
 
   Qatar has implemented a series of measures to mitigate the impact of the sanctions, including a number of new trade routes to increase trade with Turkey, Iran and Pakistan. These new measures have ensured the importing of foreign goods – especially food – no longer available regionally. While new sources of imported goods can help Qatar meet its consumption and commodity needs, the higher cost of bringing goods in from more distant places could boost inflation next year.
 
   In addition, high levels of government savings and financial buffers have allowed Qatar to absorb much of the pressure caused by capital flight from foreign investors. However, concerns remain regarding the liquidity of major banks and the Qatari Investment Authority. There is also a medium level of risk of doing business in the country, particularly around starting a business and trading across borders. Investment sentiment was dampened as a result of the blockade; in fact, three of the major credit rating agencies downgraded the country’s sovereign debt rating during 2017.
 
   The report expects the blockade will continue to weigh on trade and investment flows in 2018. The resilience of the banking sector and the measures implemented by the government are key to keeping potential economic and international risks relatively low.
 
Risks in other GCC states
In the rest of the Gulf states, there are a number of specific economic and institutional risks. The potential for the Omani rial to de-peg from the US dollar is the highest of all the regional currencies, as it is considered the most vulnerable to government expenditure reductions that may be required if the dollar continues to weaken. If the rial is forced to de-peg – however slim this risk is currently – it will not only increase the exchange transfer and sovereign risk to the region, but also pose significant political ramifications across the Gulf. Political risks across the region remain high to very high for the majority of countries.
 
   In the case of Saudi Arabia, the economy is continuing to adjust from the low-oil-price-induced recession, with current accounts recovering to positive levels and fiscal balances becoming less negative thanks to a drastic austerity plan introduced as part of the ‘Saudi Vision 2030’ reform package. The continued recovery of oil prices has perpetuated this improvement and should support the economy in the near to medium term. The bloated public sector is of significant concern however, as it provides most of the population’s employment opportunities and will need to be reduced to achieve modernisation and diversification, the report said. M 
 
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