S&P cuts Qatar's credit rating one notch to AA-

S&P Global Ratings on Wednesday cut Qatar's credit rating by one notch to AA- and put it on watch for further downgrades after Gulf Arab states severed ties.

"We believe this will exacerbate Qatar's external vulnerabilities and could put pressure on economic growth and fiscal metrics," the ratings agency said.

Saudi Arabia, Egypt, the UAE and Bahrain announced on Monday they were cutting diplomatic ties and closing air, sea and land links with Qatar.

Riyadh and its allies accuse Qatar of supporting extremist groups and of serving the interests of regional arch-rival Iran, claims Doha has strongly rejected.

"At this stage, we note that there are numerous uncertainties regarding Qatar's response, the extent to which these measures will be imposed, and their longevity," said S&P Global Ratings.

It noted a considerable increase in nonresident deposits in Qatari banks, and an increase in their lending to the government to fund infrastructure projects.

"In our opinion recent events have the potential to destabilise these nonresident deposits and provoke an outflow," said S&P Global Ratings.

It said Qatar may need to tap its sovereign wealth fund and central bank reserves to offset a major outflow of funds, and considers foreign financing of the economy to be at an elevated risk.

S&P Global Ratings also noted that the group of states which have cut off ties "provides 15 percent of Qatar's imports, potentially causing substantial shortages of key materials, including those used for construction projects, and food."

It warned it could further lower Qatar's rating "if additional or more severe restrictions from either Saudi Arabia and the group of states, or from additional trade partners, are announced."

The dispute has sparked the worst diplomatic crisis in the Arab world in years and raised fears it will cause further instability in an already-volatile region.

The AA- rating is in the middle of the investment grade in the credit rating scale, and means a borrower has a very strong capacity to repay its debts.

Credit ratings affect what borrowers may expect to pay when they raise funds by issuing bonds to investors.