I have to admit that Qatar is not a country or topic I would typically focus on for our weekly “Global Perspectives.” It typically doesn’t influence the financial markets we follow – unless there is a controversy about Qatar being chosen to host the 2022 FIFA World Cup or some conflict around failed trade negotiations.

However, the diplomatic crisis that erupted a little over a month ago – the worst since Iraq’s invasion of Kuwait in 1990 -- stoked my curiosity. Today, let’s take a look at the country and region. We will see that politics, society and economics in this country can look like a three-way intersection with no stop sign. 

On June 5, four Arab nations cut diplomatic and transport links with Qatar.  The reasons seem a bit more complex than just the stated issue of terrorism. What is very interesting is that this causes a riff in what was intended to be closer cooperation of six Arab states of the Persian Gulf, in the form of Gulf Cooperation Council (GCC).  The GCC is made up of Bahrain, Kuwait, Qatar, Oman, Saudi Arabia and the United Arab Emirates.

The GCC is something akin to the European Union (EU) and in fact had planned for monetary union by 2010 – their version of a euro.  In many ways a monetary union seemed to make sense, primarily because all GCC countries peg their currencies to the US dollar and businesses often trade using a kind of currency basket.  The effort failed, and I have to think that one of the reasons was due to European sovereign debt issues in the wake of the 2008 financial crisis exposing how difficult it is to operate a common currency. 

Today, the Qatari riyal is a focal point of weakening pressure.  The trading band of around 3.64 has been strained as investors sell financial assets, as can be seen by the drop in Qatar’s stock market of over 9%.  This has led to some speculation that Qatar will weaken or break the currency peg.  However, Qatar, like all the GCC countries, has plenty of USD-denominated liabilities that would be more expensive to service. 

Overall, the situation is still somewhat chaotic as key players are still adjusting to a difficult emerging reality.

My View: This situation is a worse mess than what markets are pricing in right now.  This is particularly true of oil prices, which should be considering a risk premium as this crisis is not resolving anytime soon.

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