Why the financial war on Qatari Riyal has failed, and why it could backfire on region

It was only a few days ago that it came to light that the UAE had hatched an aggressive plan to destabilise the Qatari Riyal using a series of economic measures.

However, as many noted economists pointed out, it has crashed and burned spectacularly and the UAE lost face.

Now, a Qatari central banker has said that the Arab states’ efforts to destabilise Qatar’s Riyal could backfire by hurting other dollar-linked currencies in the region, reported Al Jazeera.

Khalid Al Khater, currently in Britain on leave from the central bank, was commenting on moves by Saudi Arabia, the UAE, Bahrain and Egypt to isolate Qatar.

“It’s deliberate economic warfare, a strategy to cause fear or panic among the public and investors to destabilise the economy,” Al Khater told Reuters in a telephone interview, saying he was giving his personal views.

Saudi Arabia, the United Emirates, Bahrain and Egypt cut diplomatic and trade ties with Qatar in June. Most independent analysts feel that its 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.

Al Khater, architect of Qatar’s monetary policy in the 2008 global financial crisis, 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, reported Gulf Times.

This failed because the market in Qatari bonds was illiquid so trading in high volumes was difficult and because Qatar had taken precautionary steps, he said, although he did not elaborate on the measures taken,

Al Khater 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, eh said they tried to manipulate the market by exchanging Qatari Riyal at weaker levels than on the onshore market, reported Qatar Tribune.

The riyal changed hands onshore last week very close to its official peg of 3.64 to the US dollar, but it traded 3.8950 offshore on the Reuters conversational dealing platform.

Equity index compiler MSCI cited this gap last week 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.

Al Khater said Qatar could consider other steps in future to bolster the riyal if needed, such as taking payments for LNG exports in riyals rather than dollars, which would create global demand for its currency.

But he said there was a risk that efforts to undermine the riyal could shake confidence in dollar-linked currencies of other oil-reliant Gulf Arab states.

“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.’

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, Al Khater said.