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Sovereign Risk Report:Qatar’s Credit Market Risk Signals El

The economic and diplomatic sanctions imposed by Saudi Arabia, the UAE, Bahrain, andEgypt against energy-rich Qatar are expected to escalate after Qatar has refused to accepttheir demands over allegations that it supports extremist ideology. A 13-point list ofdemands included shutting down media outlets like Al Jazeera, curbing ties with Iran, andending Turkey’s military presence on its soil. Following the sanctions, Qatar’s SovereignEDFTM (Expected Default Frequency) metric1, shown in Exhibit 1, increased to 0.53% on June29 — its highest level since 2010. The EDF has since declined slightly, but remains elevated atits current level of 0.52%.

    On July 4, Moody’s Investors Service changed the outlook for Government of Qatar's ratingto negative from stable and affirmed the long-term issuer and senior unsecured debt ratingsat Aa3, citing the likelihood of a prolonged period of uncertainty extending into 2018, whichcarries the risk that Qatar’s sovereign credit fundamentals could be negatively affected2.

    The credit challenges Qatar faces include (1) economic and financial risks arising from itsongoing dispute with the sanctioning countries; (2) relatively high levels of government debtand wider public-sector debt; (3) a sharp increase in total external debt; and (4) institutionaltransparency relatively less than other highly-rated sovereigns.

    Market-based measures of credit risk for the Middle East & Africa region mostly increasedover the past week. The US Labor Department’s report on July 7 of stronger than expectedjobs data increased the likelihood of another interest rate hike. Nonfarm payrolls jumpedby 222,000 jobs last month, beating expectations of a 179,000 job gain. The combinationof a prospective interest rate hike by the Federal Reserve, low commodity prices, and thestrengthening US dollar has contributed to the rise in the probability of default for countrieslike Turkey and South Africa. The five-year annualized Sovereign EDF measure for Turkey,which received substantial capital inflows during the Fed’s quantitative easing program, hasincreased by 12% since the beginning of the month to its current 0.81% (Exhibit 1). Similarly,South Africa’s EDF measure increased from 0.78% to 0.93% over the same period.

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