Brexit: The economic fallout for the Gulf region

Brexit: The economic fallout for the Gulf region
6 min read
29 June, 2016
In-depth: The UK vote to leave the EU rocked financial markets and international geopolitics - but how will the British departure from the EU affect the economies of Gulf states?
The immediate impact of Brexit has already manifested with panic on the currency markets [Getty]
Britain's farewell to the EU caught many by surprise and delivered the 28-member union the hardest blow in its history, while shaking the very foundations of the world's largest trading bloc.

Remaining members of the EU, led by France and Germany, have already expressed their viewpoints expecting an immediate negotiation with UK and its quick divorce from the union - stating that "any delay would unnecessarily prolong uncertainty".

The immediate impact of Brexit has already been manifested in panic on the stock and currency markets, depreciation of sterling and a downturn in inward investment.

Perhaps the biggest effect following the referendum was the significant depreciation of the British pound, falling as much as 10 percent against the US dollar.

This, of course, is not great news for GCC investors in London, as they will see a sharp decline in value and returns.

While some economic analysts predicted that Gulf sovereign wealth funds would likely adopt the wait-and-see approach, others expressed fears that these funds could move out from the UK to other matured economies, such as the US, and to emerging economies.

According to Dana Salbak, head of research at Knight Frank MENA, there is no doubt that the vote in favour of Brexit will generate a period of renewed uncertainty in the prime London residential market, in which many GCC investors are heavily invested.

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"Some demand will be delayed and in some cases redirected to other markets - although the significance of these trends should not be overstated," she said.

Andrew Scott, economics professor at the London Business School, thinks that the impact for Middle East investors will be moderate.

The main effect will be felt by foreign firms, which are less likely to locate to London as part of any strategy to boost their European businesses.

"The London real estate market, especially at the top end, is less based on the fact we are a member of the EU and more based around London as a major world capital with strong property rights, easy access and withdrawal of funds and not totally transparent," Scott told The New Arab.

"None of those factors will change in response to Brexit," he said. "So while Brexit will be bad for sterling and bad for GDP, I think the impact will be less on high-end London real estate."

But since Brexit has no historic precedent there are plenty of unknowns.

David Blake, professor of pension economics at Cass Business School and a member of the group Economists for Brexit, thinks that Gulf sovereign wealth funds should stick with the wait-and-see approach, although he sees no reason for them to leave the UK.

While Brexit will be bad for sterling and bad for GDP... the impact will be less on high-end London real estate

Besides, "if we keep the financial services 'passport'   [allowing banks and other corporate headquarters based in London to operate freely within the EU] any slump in property prices will be temporary".

"Meanwhile, [the] UK government certainly needs to act very friendly towards non-EU investors."


One paradoxical short-term effect of Brexit is that it might lead to a significant increase in foreign investment in the UK, as investors eye a once-in-a-life-time opportunity to purchase UK assets on the cheap.

On the eve of the vote the pound sat 14 percent below its mid-2014 peak, meaning pricing in the prime market was more attractive for dollar buyers.

It seems a reasonable assumption to make to suggest that interest rates will be lower for longer, despite the risk of imported inflation from a weaker pound.

"While the long-term benefit of ultra-low interest rates on the housing market may be questionable, in the short-term they will act to underpin demand especially for equity-rich buyers with access to the best funding rates," said Salbak.

"It is very possible that they might be confused and nervous at first, but it would be not easy to identify any other obvious alternative destination for investors."

Weaker sterling vis-a-vis Gulf currencies pegged to the US dollar will make GCC imports from the UK much cheaper

Prime London property will remain a magnet for investors and the Brexit decision will not have much impact on London's unique offer.

Many Gulf analysts even expect to see an improvement in the trade volume between GCC states and the UK in the aftermath of Brexit, since weaker sterling vis-a-vis Gulf currencies pegged to the US dollar will make GCC imports from the UK much cheaper - at least in the short term.

Future FTA challenges

But much of this depends on the UK's future relations with EU neighbours and the policies of the next UK government.

Many expect that Britain's departure from the EU will impel UK government towards swift and proactive foreign trade policy and open a space towards forging bilateral trade deals or free trade agreements with countries outside the EU, including GCC states.

Guy Lougher, partner-head of the EU & Competition at Pinset Masons, said that the EU has negotiated free trade agreements on behalf of its 28 members, which often makes such negotiations very complex and protracted because the EU needs to negotiate a deal that appeases a large number of countries.

Negotiating just for itself, a post-Brexit UK may be better placed to negotiate such deals on its own, and to do so more quickly than the EU, it has been suggested.

Many expect that UK departure from EU will impel UK government towards swift and proactive foreign trade policy and open a space towards forging bilateral trade deals or Free trade agreements with other countries outside the EU, including GCC states

Blake remarked that Brussels failed to finalise trade deals with the US, China and India, even after 10 years of negotiations - but now the UK can do it directly, expressing optimism about the long-term economic future of the UK outside the EU.

However, the UK must negotiate a quality trading relationship with the rest of the EU, allowing the UK access to the single market, he added.

"It is particularly important that UK financial services companies, such as banks, are able to retain their 'passport' to trade in the rest of the EU," Blake said.

"Our bargaining position is strengthened by the fact that the EU sells us £70bn more in goods and services per annum than we sell to them," he said.

"Germany sells us £25bn more than it buys from us. Once we have worked out a sensible deal with Germany, every other country will fall into place."

But a practical problem for the UK will be constraints on its governmental resources and its paucity of experienced trade negotiators, pointed Lougher.

In the aftermath of Brexit, it is very unlikely that the UK would initially seek to establish closer trade relations with the rest of the world, including the GCC, as negotiations with the EU, the UK's main trading partner, will be all time-consuming.

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