Moody's Investor Service on Wednesday changed the outlook on Qatar's rating to negative from stable citing "economic and financial risks" arising from the Gulf state's ongoing dispute with a group of countries, including three GCC states and Egypt.

The ratings agency, which believes that "a quick resolution is unlikely and that the stalemate may continue" for some time, stopped short of downgrading Qatar's rating, reaffirming the long-term issuer and senior unsecured debt ratings at Aa3.

The negative outlook implies that this score of Aa3 - which defines Qatar's credit as high quality with a very low credit risk - could soon be on the decline as the increasingly isolated country faces tougher sanctions and even expulsion from the GCC.

In Moody's view, the likelihood of a prolonged period of uncertainty extending into 2018 has increased and a quick resolution of the dispute is unlikely over the next few months, which carries the risk that Qatar's sovereign credit fundamentals could be negatively affected. In June, Standard & Poor's lowered its long-term rating on Qatar to AA- from AA and placed the rating on credit watch with negative implications.

"We believe this will exacerbate Qatar's external vulnerabilities and could put pressure on its economic growth and fiscal metrics. The negative credit, watch encompasses numerous downside risks to the ratings as a consequence of recent events," S&P said in a note. Moody's said the rating affirmation at Aa3 takes into account a number of credit strengths embedded in Qatar's credit profile and reflects its view that the sizeable net asset position of the Qatari government and exceptionally high levels of wealth will continue to provide significant support to the sovereign credit profile for the time being.

The global ratings agency believes that the ongoing dispute is unlikely to be resolved soon. Moody's thinks that a prolonged period of uncertainty will negatively affect business and foreign investor sentiment and could also weigh on the government's long-term diversification plans to position the country as a hub for air traffic, tourism, medical services, education, and sports through a higher risk perception among foreign investors.

"Weaker economic activity could also lead to deteriorating asset quality in the banking system and together with an escalation involving sanctions against the financial sector could necessitate a step-up in government liquidity support. No such sanction has been applied to date and activities in the banking system have returned to normalcy following a few days of volatility when the measures against the country were announced," the ratings agency said.

"Depending on the duration and potential further escalation of tensions, the dispute could negatively affect Qatar's economic and fiscal strength.

In the absence of a swift resolution, economic activity will likely be hampered by the measures imposed so far," Moody's said.

Source: Khaleej Times