Qatar’s riyal has come under high pressure as Gulf Arab commercial banks began to hold off on deals with Qatari banks because of the diplomatic split in the region.

Moody’s Investors Service stated that the Gulf country’s credit quality would decline severely if tensions with fellow GCC countries continue indefinitely.

“We expect that Qatari banks’ funding costs will likely rise for debt securities, and there is a risk of withdrawals from non-resident deposits and interbank facilities, because a portion of these are sourced from the GCC,” said Steffen Dyck, vice-president and senior credit officer at Moody’s.

The move by UAE, Bahrain, Saudi Arabia and Egypt to blacklist dozens of figures with ties to Qatar could further squeeze liquidity at Qatari banks which have around 60 billion riyals ($16 billion) in funding in the form of customer and interbank deposits from other Gulf states, stated Chiradeep Ghosh, a banking analyst at SICO Bahrain.

UAE central bank has ordered local banks to stop dealing with the 59 individuals and 12 entities with links to Qatar and to freeze their assets, state news agency WAM reported.

It has also told them to apply enhanced due diligence for any accounts they hold with six Qatari banks, including Qatar National Bank (QNB), WAM stated in its report.

“All Qatari banks will struggle for liquidity and will have to pay a premium for funding from elsewhere outside these four countries,” Ghosh said.

Standard & Poor’s Financial Services downgraded Qatar’s debt as the riyal currency fell to an 11-year low amid signs that portfolio investment funds were flowing out of the country.

“We expect that economic growth will slow, not just through reduced regional trade, but as corporate profitability is damaged because regional demand is cut off, investment is hampered and investment confidence wanes,” S&P said.

Also banking sources said some banks from Saudi Arabia and Bahrain delayed letters of credit and other deals with Qatari banks after their governments cut their diplomatic ties with Doha.

Saudi Arabia’s central bank advised banks in the kingdom not to trade with Qatari banks in Qatari riyals, Reuters reported.

UAE banks would find it relatively easy to comply with the rules as many had invested in improving their compliance systems in recent years and already complied with sanctions against a range of other entities and individuals, another banker said.