Qatar, the gas-rich Persian Gulf state, is going through one of the most challenging periods in its history. It has been accused of supporting terrorism and has been cut-off, economically and diplomatically, by its gulf neighbors since June. The government is having to shore up the banking sector. Traditional causality thinking would have you believe that the crisis has led to deflation. However, money started leaking out of the country and asset prices started falling long before now.

The chart above shows that the Qatar stock exchange index topped out in 2014 and has dropped by over 40% since then. An index of Qatari banks shows a very similar path, the weakest bank performances coming from The Commercial Bank (Q.S.C.), down 58% from 2014, and Doha Bank, down 55%. Underperforming banks are usually a clue that something is not quite right, and Qatar’s money supply numbers have borne that out.

M1, the narrow measurement of money, started deflating in the second half of 2016 and M2, a broader measure, started deflating in early 2016. M2 has reflated this year as the government has injected money into the banking system. But it is interesting that M1 continues to deflate, the main reason being a collapse in demand deposits. This is people taking money out of the banks – essentially, an old-fashioned bank-run.

Qatar’s consumer price index started falling on an annualized basis in August, and property prices are tumbling too.

Not so long ago, Qatar was considered to be one of the pearls of the gulf, with its glitzy property and high-profile tourism. But confidence is ephemeral. It can go in an instant. At this juncture, Qatar still hopes to be hosting the 2022 soccer World Cup, a competition where many dreams are deflated. If Qatar’s deflation continues, however, the only cup the country may be holding is a begging bowl.

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