Cairo – Decypha: The Gulf Cooperation Council (GCC) countries have witnessed in the past two years a series of cuts in government spending, mostly due to the oil slump; however, most economic analysts believe the region’s outlook is of fruitier prospects, some due to reform measures taken by GCC countries, while other see the appeal GCC countries have on international investment, particularly from the United Kingdom (UK).
Dubbed the Brexit, the British exit from the European Union (EU), is deemed a turning point for the UK’s economy as dit would entail adjusting the kingdom’s economic policies andinternational agreements, in addition to its impact on the value of the Great British Pound (GBP), a factor that is expected to benefit emerging markets and oil-rich countries who are major importers of UK goods.
The Brexit economy
Formed in Brussels in 1993, the EU allowed member countries free flow of trade under the agreement signed by members, where EU counties were treated as a single market.
Current UK’s Foreign Secretary, Boris Johnson, had led the Brexit campaign, which focused on controlling the flow of migrants into the kingdom, while the campaign promoting the benefits of remaining part of the EU, led by former Prime Minister, David Cameron, played on the economic risks of quitting the union; however it failed to convince more voters.
The global economic scene is yet to correctly evaluate the effect of the Brexit, which will become more apparent as the exit becomes officially finalised by the 31st of March 2019.
Although the exit of the UK, which is the world’s fifth largest economy in the world, is expected to affect the EU economy as a whole, UK politicians and experts are yet to agree on the severity of impact on the country itself. UK Prime Minister, Theresa May, said in January 2017 that her country might see some “bumps in the road,” a fact that led her to stress on the importance of securing new international deals before the official exit.
Currently only 11% of UK’s businesses export their production, thus the need to push forward its trade levels after Brexit, according to a November statement by British secretary of International Trade, Liam Fox. During the same month the Office for Budget Responsibility stated that the economic growth is forecasted to slow, while other published outlooks expect a decline in the value of the GBP, inflation levels and real estate prices.
The GCC’s recovery
Meanwhile, the GCC countries, which are strategic trade partners of the UK, are in the might of their own recovery battle.
After reductions in public spending, lack of sufficient liquidity and an uncertain investment climate, the economic growth in GCC countries is anticipating a modest recovery this year, according to recent forecasts made by BMI Research and Coface research.
Both the UAE and Qatar are expected in these forecasts to react to the economic recovery better than other Gulf countries, benefiting from their already diversified economy.
Taking some correction measures to diversify their income after international reduction of oil prices, GCC economies are anticipated to register a collective economic growth of 2.3% in 2017, up from 1.7%, according to an International Monetary Fund (IMF) staff outlook.
Supporting this forecast, the non-oil sector in the UAE is also expected to grow in 2017, on account of to high government spending on Expo-2020 in Dubai and increasing the fiscal consolidation in Abu Dhabi, as stated in a Standard Chartered report published in December.
Additionally, private sector non-oil activities have flourished in Saudi Arabia and the UAE in December 2016 as new business orders and export deals were reached, according to Emirates NBD PMI index. In Saudi Arabia, the non-oil economy is hoped to shape 50% of the economy by 2030, according to the official Saudi 2030 Vision.
Impact of Brexit on GCC
With the value of the GBP significantly falling by 30% after the Brexit referendum, global economies started to fear another global market recession similar to the 2008 financial crisis. This sentiment has appeared in Deloitte’s survey in the second quarter of 2016 (Q2-16) where 68% of 130 CFOs of UK companies expected the economy to be worse after Brexit, however, this percentage slightly decline to 60% in Deloitte’s latest survey published on 7 April.
Most of the surveyed respondents were positive about mergers and acquisition activity (M&A), capital expenditure, hiring and discretionary spending activities. Confirming this optimistic approach, GCC overseas businesses showed little concern as the Director of specialist consultancy AESG, Saeed Al Abbar said in an interview with Construction Week Online that the Brexit did not have an impact on his London operations.
Al Abbar additionally explained that Brexit’s economic impact cannot be predicted yet, adding that his company did not observe an impact so far.
The Brexit did not have a huge impact on the stock market transactions in the GCC as well, according to a report published by the Trend Institution published, which said that investors realised that the impact of the UK leave is “limited”.
The Dubai Financial Market (DFM) saw the largest decline compared to other regional markets. The reason of which is believed to be due to the larger percentage of foreign ownership in the country, in addition to an enhanced vulnerability towards the British economy, mostly due to UK tourists and the reliability of the real estate sector on foreign customers, according to the report.
The decline in GBP, which is still uncertain how long it could last, is also expected to have an impact on tourist flows to the UAE, which was already affected by the downfall of Russia’s rouble value, the report added.
Additionally, the value of the holdings of UAE’s and Qatar’s Sovereign Wealth Funds (SWFs) and High Net-worth Individuals (HNIs), which are main investors in the British real estate market, are expected to demur, according to Shailesh Dash, founder and CEO of Al Masah Capital.
However, this potential decline in value was seen to be a good opportunity for GCC investors who want to enter the UK real estate market.
The size of the sovereign funds will also be resilient in front of fluctuations in the real estate assets value, according to Steffen Dyck, Moody’s Senior Credit Officer.
“GCC sovereign wealth fund portfolios are generally large and well diversified, and this will allow it to absorb the impact of asset price and exchange rate movements associated with Brexit,” Dyck explained.
Trade balance between the UK and GCC countries, which accounted for approximately 2.7% of the global trade in 2015, standing at $34.3 billion, was also another point of concern for economists.
Impact on different GCC sectors
The decline in the value of the GBP compared to GCC currencies will improve trade balance between the UK and GCC countries, especially in automotive, telecom and power sectors, said Al Masah Capital’s Dash.
With the UK representing 1.6% of the international oil consumption, the GCC’s export levels from oil will not be negatively affected, Dash added.
The UK investments in the GCC, which is largely in the hydrocarbon sector, is not expected to slow down after Brexit, according to Moody’s. However, the report mentioned that the availability of new funding might be affected by the market uncertainty emerged after Brexit.
British investments in the property sector in the UAE are also forecasted to grow as Britons spent $2.6 billion in that real estate purchases in Dubai in 2015, the Telegraph reported.
Regarding other trade deals, the UK will have a chance to boost trade relations, especially with the UAE due to being considered as a key trading hub for the MENA region, Dash expected.
Moreover, GCC countries and the UK are now having bigger chance to seal a long-pursued Free Trade Agreement, Sean Evers founder and managing partner at Gulf Intelligence told The National.
GCC trade figures with the UK are also expected to grow from 2.7% of the region’s international trade, according to rating agency Moody’s.
FDI influx in GCC post Brexit
The GCC countries are a crucial market to the UK economy, specifically Saudi Arabia, which represents a large investment and export market for the UK in the MENA region, as it imported a worth of GBP 5.4 billion in 2015, besides receiving investments in transport, infrastructure, healthcare and education sectors in the kingdom, according to data compiled by the British Department for International Trade.
Ranked as the 12th globally, the bilateral trade between the UK and the UAE has reached GBP 12.95 billion in 2014, with the UAE acting as a trading hub for the British companies.
Similarly, Qatar is the third largest UK’s export market in the region, as in 2014 UK had exported GBP 2.3 billion, while it imported a worth of GBP 2.2 billion, majorly LNG supplies.
Kuwait is also considered one of the largest export partner to the UK as it imported a worth of £1.7 billion in 2015.
Economic relations between the UK and GCC countries are expected to further strengthen as British Prime Minister spoke at the 37th Gulf Cooperation Council Summit in Manama in December. During the event, both parties launched GCC-UK Strategic Partnership to boost their cooperation in politics, defence, security, development and trade relations.
In her speech, May said that she wants to build a new chapter in the UK cooperation with the Gulf after the Brexit.
Raising hopes even higher, May had visited Saudi Arabia in early April, offering to help the kingdom in diversifying its economic dependency on oil exports. She also raised increasing the involvement of women in the workforce.
Nevertheless, the UAE seems to have better chances as 75% of British businesses are considering expanding their investments to the emerging markets, specifically Dubai, according to data provided by Dubai Multi Commodities Centre.
These expectations, however, might be crippled by a funding availability issue in the UK, especially at a time when GCC sovereigns have higher borrowing requirements, “although this is unlikely to affect their liquidity positions. Recent debt auctions by GCC sovereigns attracted diversified investor interest and were significantly oversubscribed,” said Mathias Angonin, an analyst with Moody’s.
While outlook remains positive for the UK-GCC relations, and with cooperation proving enough to secure a steady economic performance during the coming years, each country still needs to address its economic challenges to secure growth March 2019, when Brexit becomes an official reality.
By Doaa Farid
