With the initial knee-jerk reaction over Brexit – the term given to the UK’s decision to leave the European Union (EU) – subsiding and the currency and equity markets adjusting to the new reality, it’s time to assess the impact of Brexit on the Middle East’s economies. Reactions thus far have mixed about how things might or might not work for Britain and the EU.
However, in reality, Brexit might not make a huge difference in travel and trade for the people in the Middle East. At most, there will be a slight difference in investment – depending on how the British pound sterling and the overall economy perform. The Brexit win has led to the British pound sterling hitting a record 32-year low, declining by more than ten percent to stand at $1.33, compared with $1.50 just after polling stations closed.
The sterling’s weakness could have potentially both positive and negative effects for regional economies. Depending on how long such currency weakness lasts, it could significantly impact tourist inflows to the Gulf, which have already been negatively affected by the weakness of other currencies, such as the Russian ruble and the Chinese yuan.
Advantage for GCC investors
“GCC investments into the UK may begin to look much more attractive, considering the exceptionally weak sterling levels that might be seen, representing something of a once-in-a-lifetime opportunity to purchase UK assets,” Tim Fox, chief economist of Emirates NBD, said. “Unlike other regions, GCC investments into the UK are, for the most part, not made with the motive of accessing European markets. Rather, they are standalone investments made in their own right, in areas such as real estate and hospitality.”
Faisal Durrani, head of research at Cluttons, commented: “Any US dollar or UAE dirham investors will find the price of an average prime Central London residential asset $96,000 (AED350,000) less than it was on June 20. So, London residential property is now $96,000 cheaper for international buyers looking to enter the market.”
He added: “A silver lining today is that those from the Gulf eying a London residential asset will find it 31 percent cheaper than it was during the last market peak in Q3 2007, suggesting that we may be on the cusp of seeing a significant resumption in property investment activity in the British capital, mirroring the results of our recent Middle East Private Capital Survey, particularly as global investors seek out safe-haven assets, such as gold and London’s bricks and mortar, which, we expect, will retain their appeal.
“The longer-term implications are too early to assess, but we may start to see the unlocking of London’s stalled residential property market, with investors both exiting and entering the market as we head toward a period of demand volatility.”
A recession might reduce asset price and attract investments from the Gulf. Otherwise, it might be ‘business as usual’ for GCC businesses and consumers. “The biggest sadness of today is that it is reasonable to assume that the UK will quickly enter a period of economic recession,” Richard Buxton, head of UK equities and CEO of Old Mutual Global Investors, told TRENDS. “It is, in effect, likely to be the first ever ‘DIY (do-it-yourself) recession’, as George Osborne prophetically called it.
“It is difficult to say at this stage what action the Bank of England may take, but it is not impossible to imagine that it may quickly cut interest rates. Restarting the program of quantitative easing – a feature that has been absent from the economic landscape for some three years now – also looks like a possibility.”
The oil price declined immediately by roughly five percent as the likely result of the Brexit vote became clear, suggesting expectations for a marked decline in global demand. During this period of uncertainty, inward investment is likely to remain muted at best, as both international and UK businesses consider their options for future capital expenditure and hiring.
“One of the first outcomes from the result of the referendum is that the value of the pound will inevitably fall in the near term, as will the stock market. The chances of a technical recession, as business investment is curtailed, are high, and exporters and financial -services firms will be at the forefront of the downturn,” said James Roberts, chief economist of global real estate consultancy Knight Frank.
“In light of the above risks, we expect the Bank of England, seasoned by the experience of the global financial crisis, to respond quickly. An interest rate cut of 25 basis points is a strong possibility at the Monetary Policy Committee’s meeting,” he added. “We may also see a return of quantitative easing, if there are signs that investment is deteriorating. Consequently, we see the effect on the UK as consisting of a -high-speed mini-economic cycle.”
In the coming weeks, a combination of falling sentiment and those investors who are over-extended having to sell will result in some disposals, which will be likely to weigh on asset prices.
Impact on the Middle East
This coincides with a devaluation of the pound. The combination of lower prices and the exchange rate effect should then draw in overseas investors looking to acquire assets in the UK, attracted by a G7 country with a track record of achieving strong economic growth, Roberts said.
Although a lower pound might help the forex traders and equity investors cash in, everyone knows that it is a short-term situation. In the long term, how would this separation fan out for the Middle East?
Britain might have been a member of the EU in theory and in certain aspects. However, for most practical purposes, it remained a different entity, at least to the common man. Even when it comes to taking a united political stand, Britain has a history of defying the EU position. The 2003 attack on Iraq on the pretext that the country possessed weapons of mass destruction was one example of a scenario in which the EU had a completely different opinion.
Let’s face it, for the people and businesses of the Middle East, Britain and the EU had for long remained two different entities when it came to trade, investment, currency and visa regime. Travelers from the GCC and the rest of the Middle East will still have to apply for visas separately for entering the UK and the EU, except for countries that have exemptions for
“Although we have to respect the British electorate’s mandate on their decision to leave the EU, I believe the voters were guided by the short-term discomfort against the long-term benefits of a stronger union that could have worked well for both,” Thumbay Moideen, founder-president of Thumbay Group, told TRENDS.
“As far as the people of the GCC and the UAE are concerned, it doesn’t matter much, as we will have to continue to deal with two currencies and two visa regimes for travel and expenses. For us, it’s business as usual,” he added.
Adnan Nalwala, executive director of Al Ansari Trading Enterprise, Natural Stone, Akar Technical Services, concurred. “For people and businesses in the Gulf, it is business as usual. In any case, we had to deal with two entities – Britain and the EU – when it came to deal with currency, visa and other aspects of travel and business,” he said. “For us, nothing changes. The real issue will be faced by the British people, many of whom will be deprived of the benefits of an integrated EU.”
Free Trade Agreement
Bilateral trade between the GCC and the EU reached 155.5 billion euros, or 14.7 percent of the GCC’s global trade last year. The GCC is the EU’s fifth largest export market, with 111.6 billion euros of exports in 2015, a 15 percent growth year on year, while the EU is the grouping’s biggest trading partner.
Europe imported 43.93 billion euros worth of goods from the GCC last year. The six GCC countries represent 4.4 percent of the EU’s total trade. The 1988 Cooperation Agreement contained a commitment from both sides to enter into negotiations on a free trade agreement. Negotiations have started and have been suspended several times since 1990. They resumed in March 2002, but were suspended by the GCC in 2008.
Further informal contacts have taken place ever since. Although the EU says it remains committed to concluding the agreement, there are no practical signs in that direction. Global businesses have been dealing with two currencies – the British pound and the euro – for a long time. That does not change with Brexit. What might change is the way free trade agreements with the GCC progress.
GCC countries stalled the negotiations for a Free Trade Agreement (FTA) with the EU in 2008 due to certain issues, although talks with Britain continued. However, once Britain completely exits the EU, which will take more than two years, the GCC countries -collectively or unilaterally could strike FTAs with Britain, which will be free to do so.
Analysts predict that, once Britain leaves the EU, it will be in a better position to strike bilateral trade deals with GCC governments. Last year, Britain concluded a double taxation agreement with the UAE. With Britain’s exit from the EU, both the countries will now be able to achieve the bilateral trade target, which was to more than double the current value of trade – which stands at AED135.24 billion – by 2020.
Bilateral trade between the GCC and the UK grew by 12.12 percent last year to reach AED135.24 billion, up from AED104.28 billion in 2014.
Some analysts believe that British trade policy can become more assertive outside of the EU, as Britain will strive to make deals and win orders all over the world to compensate for the loss of its access to the EU market. British multinationals could become more ambitious in strengthening their position in regional economic hubs such as Dubai, to establish a more prominent footprint across this region.
“Extracting itself out of the stalled EU-GCC FTA process may actually breathe new life into the UK’s trading relationships with the Gulf, as well as with other parts of the world,” said Emirates NBD’s Fox.
And this could well be the silver lining in these uncertain times, as the world waits to see how the British economy performs in the months to come.