DOHA, Qatar — When the $1.8 billion Doha Festival City retail development opened in April of this year, it was expected to lure both foreign investors and tourists to the country, diversifying the economy as well as delivering an attractive destination for locals.

As of this week, those foreign investors and tourists are unlikely to even get close to the country. In a new diplomatic fallout, Saudi Arabia, Bahrain, the UAE, Egypt and Yemen have cut ties with Qatar and isolated it by suspending all land, air and sea travel to and from the country, causing the Qatari stock market to plummet.  The five countries have also stated that Qatari citizens have two weeks to return home, with diplomats also being expelled.

The situation was sparked by news that the Qatari government paid blacklisted al-Qaeda affiliates and Iranian security officials up to $1 billion ransom in return for the release of members of its royal family who were captured in Iraq.

This latest rift between Qatar and its GCC neighbours is one of several in recent years, however the imposing of economic sanctions this time has raised concerns about what this could mean for the Qatari market and whether it will have a knock on effect on the luxury goods industry.

Certainly, despite its small size, Qatar is heavily invested in the global luxury sector. The sovereign wealth fund, Qatar Investment Authority, is the owner of landmark department store Harrods, while state-backed conglomerate Mayhoola for Investments has significant stakes in brands including Valentino, Anya Hindmarch and Balmain; most recently it was rumoured to be eyeing Jimmy Choo as a potential acquisition target.

It is the businesses in Qatar itself that are more vulnerable to this political fallout, however, as well as the markets they serve.

Qatar's Domestic Market

According to Euromonitor International, Qatar’s apparel and footwear market was worth $1.3 billion in 2015 and it was forecast to grow by 51 percent by 2019.

“If mediations are prolonged, then our forecasts will be revised to the downside," said Michelle Berman, head of consumer research at emerging market intelligence firm BMI Research. BMI expects consumer spending in Qatar to grow by 3.2 percent in real terms in 2017, which will see consumer-spending levels in the country reach $31 billion.

A long-lasting rift would have significant negative economic ramifications for the country.

The more immediate concern is logistical. Some fashion and luxury brands distribute to Qatar via the UAE where they have partnerships with Dubai-based operators and some Qatari local brand partners to Doha also import from Europe via the UAE.

“Goods for the retail sector are shipped into the country via containers and Qatar is heavily reliant on the transhipment of these containers via UAE ports,” explains Berman. “So far one UAE port (the port of Fujairah) has announced that it is barring all vessels flying the Qatari flag and vessels sailing to or from Qatari ports. If other UAE ports follow suite then Qatari’s retail supply chains are going to be disrupted."

“The Qatari shipping line Milaha holds a 90 percent market share of the transhipment routes between the UAE and Qatar and so will now potentially be barred from UAE ports,” Berman adds. This could have a potential knock on effect on domestic retail spend as a result of a lack of new imports.

While the possibility of a failure to repair relations cannot be dismissed, BMI maintains that “gas-exporting Qatar still has huge fiscal buffers and mainly trades outside the sub-region, meaning its overall economic stability is not under direct threat from the cooling of GCC ties.

Tourist Spending in Qatar

If the diplomatic row were to continue, Qatar could suffer an impact on its tourism industry, and the luxury retail opportunity that comes with it.

While the travel ban is causing disruption to flagship carrier Qatar Airways flights, the implications on Qatar’s inbound consumer spend are not yet clear. The Qatari luxury market is relatively insulated, and despite a string of luxury shopping malls attracting major luxury brands like Prada and Dolce & Gabbana, Qatar’s capital Doha is far less of a global travel destination than nearby Dubai. In fact, according to Euromonitor International, Qatar’s tourist market is smaller than that of most other countries in the Gulf.

But this is set to change in 2022 when Qatar will play host to the FIFA World Cup. Much of the country’s retail development is slated to open in time for the sporting event, which is expected to bring in a million visitors. The diplomatic row has cast a shadow over the breakneck pace of building shopping malls and districts around the country.

Real estate firm DTZ estimates that Qatar's retail space will grow by 220 percent by 2019. Last December saw the opening of the 500,000 square metre Mall of Qatar, the nation’s 15th major retail complex. Other developments underway include the $290 million North Gate Mall, the 57,605 square metre Marina Mall and the outdoor Katara Mall, which will house Qatar’s first Galeries Lafayette.

Expect a Resolution

Due to the sensitive political nature of the topic, many players within Qatar's luxury fashion space declined to comment for this article, but BMI has confirmed that they will not be adjusting any of their consumer spending forecasts as a result of the events. Berman attributed this to a belief “that the diplomatic rift will be resolved quickly."

“Our core view remains that Doha will make considerable efforts to avoid a substantial prolongation or further escalation of the situation," added Andrine Skjelland, MENA country risk analyst at BMI.

"A long-lasting rift would have significant negative economic ramifications for the country, and the maintenance of Gulf ties has become increasingly important for the Qatari government amid elevated regional instability.”

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