Qatar Riyal Peg Under Stress as Central Bank Stands Aside

Foreign investors are testing Qatar’s currency peg, with the riyal poised to complete a third week trading outside the central bank’s preferred range.

The country’s diplomatic row with some Arab nations has disrupted the offshore markets, creating a temporary dollar shortage. That’s left the riyal trading as much as 3.6 percent weaker than the lower band of the official range, even as the central bank refrains from intervening to buoy the currency.

“It is not unusual for a central bank, even if it’s operating a pegged exchange-rate regime, to not intervene to satisfy offshore demand within the usual band,” Dima Jardaneh, the head of economic research for the Middle East and North Africa at Standard Chartered Plc in Dubai, said in an email yesterday. The Qatar Central Bank “is providing dollars to domestic banks at the pegged rate, satisfying onshore dollar demand and supporting the credibility of the peg.”

The currency slumped to as low as 3.7794 per dollar on Friday, the weakest level in three decades, before trading at 3.7550 by 12:34 p.m. in Doha. The central bank typically buys and sells dollars to keep the exchange rate within a range of 3.6385 to 3.6415 riyal.

Qatari banks rely on non-residents for almost a quarter of their deposits and the June 5 decision by Saudi Arabia, the United Arab Emirates, Bahrain and Egypt to cut ties with the country prompted some Gulf banks to withdraw funds, sparking a market selloff.

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S&P Global Ratings lowered Qatar’s long-term credit rating one level on June 7 and put it on negative watch on concern the diplomatic standoff may weaken the nation’s finances. It “will exacerbate Qatar’s external vulnerabilities and could put pressure on its economic growth” and widen its fiscal and current-account deficits, the New York-based company said.

The central bank has sufficient foreign-currency reserves to defend the peg and lenders have sufficient liquidity, state-run Qatar News Agency reported June 6. The Qatari riyal has been pegged to the dollar since July 2001 and before that to Special Drawing Rights since 1975.

But the central bank’s absence in the offshore market “would mean that the rate could continue to rise,” Jardaneh said. “Eventually, and to close the gap between the onshore and offshore rates, we expect a direct or indirect intervention that would flood the offshore market with dollars, bringing down the rate fairly quickly.”