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LONDON (Reuters) - Qatar's credit quality would decline if tensions with its Gulf neighbors continue for much longer, raising the country's debt ratio and hurting banks' liquidity, Moody's ratings agency said on Thursday.
"A prolonged or deepening rift between Qatar and its GCC neighbors would potentially have a more marked financial effect and increase funding costs for the sovereign and other Qatari entities," Moody's told clients.
It currently rates Qatar at Aa3 with a stable outlook, or seven notches above junk.
"An escalation could include restrictions on capital flows, which would be negative for Qatari banks' liquidity and funding," Moody's said, adding that total external debt was 150 percent of gross domestic product.
Eight mostly Arab countries, including Saudi Arabia and United Arab Emirates this week severed diplomatic relations with Gulf Cooperation Council (GCC) member Qatar while also suspending air, land and sea transport and imposing travel bans.
Rival ratings agency S&P Global cut its rating on Qatar on Wednesday to AA- and put the rating on CreditWatch with negative implications, meaning there was a significant chance of a further downgrade.
(This story corrects Qatar's rating in para 3 to Aa3, not A3)
Reporting by Marc Jones and Sujata Rao; editing by Claire Milhench