What is Brexit's impact on the GCC and Mena region

dubai - The referendum has set in motion a process that bodes turbulence for global and regional economies

On June 23rd, the people of Britain voted to exit from the European Union (EU), in a decision which will transform Europe - and for that matter, the global economy - forever.

While the outcome caught many by surprise and prompted jubilant celebrations among Euro skeptics, it also shook the very foundations of the world's largest trading bloc (given that the UK accounts for almost 14 per cent of the EU's GDP) and also dragged global financial markets along with it. In the immediate aftermath, the global markets lost $2.1 trillion in value while the British pound fell to a record 30-year low. Clearly, this historic referendum has set in motion an unprecedented and unpredictable process that bodes turbulence for global and regional economies.

GCC businesses and investors will face two major concerns: Firstly, the valuation of the British pound and its implication on inward investments; and secondly, the impact on GCC trade arrangements. Additionally, the volatility in currency markets can also have a bearing on other asset markets such as commodities and global monetary policy, all of which would have a direct impact on the region.

It is a known fact that GCC-based Sovereign Wealth Funds (SWFs) and High Net-worth Individuals (HNIs) invest heavily in the UK's real-estate market, with the UAE alone accounting for more than 20 per cent of buy-to-let property sales in the UK in 2015. The Qatar Investment Authority (QIA) is also among the high-profile investors in London real estate, snapping up landmarks such as the Shard skyscraper, Harrods department store, and Olympic Village. Consequently, the depreciation of the British pound will mark down the value and returns of these holdings.

Moreover, if the UK's economy plunges into recession, the curtailed business sentiments would further diminish the attractiveness of commercial properties. However, it is important to note that SWFs are typically large and well-diversified, which allows them to absorb the impact of asset price and exchange rate movements. Consequently, it is unlikely that the loss in value of the existing GCC investments will weaken the net asset position of the GCC governments.

On the other hand, purchase of new assets in the UK will look much more attractive, considering the exceptionally weak sterling levels, representing something of a once in a lifetime opportunity for GCC investors. While the GCC's investment in the UK may increase, it is unlikely that Brexit will have any negative impact on FDI inflows in the region as most of the UK's FDI is in the hydrocarbon sector, which remains resilient to these developments as UK accounts for a marginal share of total global oil consumption.

Trade between the GCC and the UK has been relatively modest in recent years, with the latter accounting for ~2.7 per cent of the region's global trade in 2015. According to the UK Trade & Investment Commission, the total volume of bilateral trade between Britain and GCC countries increased by 78 per cent since 2009 to $34.3 billion in 2015, with the total exports to the UK reaching $11.1 billion, while the imports are valued at $23.1 billion.

In this context, a weaker pound in comparison with Gulf currencies, which are largely pegged to the US dollar, might help in improving the trade balance with imports such as luxury vehicles from British manufacturers or capital equipment in sectors such as telecom, power, etc., getting cheaper. Secondly, the GCC's major export commodity - oil, is unlikely to take much impact as the UK only accounts for 1.6 per cent of total global consumption. However, if Brexit triggers similar referendums in other EU countries, it might have a deeper impact on oil prices as the total EU bloc accounts for ~15 per cent of the global oil demand.

Thirdly, having lost free trade access to the EU, the UK will be more inclined to strike beneficial bilateral trade deals with the GCC that the EU has not been able to close despite negotiations going back to 1988. Building trade relations with wealthier GCC countries would be a key priority for the UK, which will present an exclusive opportunity for the region, especially the UAE as it acts as a trading hub for the wider Mena region. However, Britain would also need to renegotiate its trade relations with Morocco, Egypt, Algeria, and Tunisia, all currently covered by EU association agreements which grants tariff exemptions.

Overall, the impact of Brexit is likely to be somewhat positive for GCC countries as uncertainty in the markets is likely to boost global growth, especially in the US, with the possibility of the US Fed delaying the increase in interest rates. This bodes well for the region as it will allow the GCC economies to partially offset the impact of falling oiling prices by swiftly raising capital from international bonds. Further, with the strengthening of the US dollar, the imports from the UK will become cheaper and the possibility of beneficial trading agreements between the GCC and a newly independent UK will further bolster growth prospects for the region.  

Though headwinds related to the devaluation of the GCC's existing investments in the UK and tourist inflows to the region might persist in the short term, it will eventually flatten out as the two sides bind into favorable trade and investment agreements going forward.

The writer is the founder and CEO of Al Masah Capital. Views expressed are his own and do not reflect the newspaper's policy.