Brexit: Trade and currency are GCC’s concerns

In the event of a Brexit, there are two major implications for GCC businesses and investors with operations or interests in the UK: the valuation of the British pound and the impact on GCC trade agreements. Daniel Leal-Olivas / AFPShow less

The EU referendum on June 23 is one of the most controversial and strongly debated issues in British political history.

As the big day approaches, we have seen heightened tension between the Remain and Leave campaigns with the polls seeming evenly split for both camps, despite warnings issued by the UK Treasury, the Bank of England, the IMF, and the OECD, all of which have cautioned on the economic repercussions of a Brexit vote.

But why is this referendum relevant to the UAE and the Middle East? In the event of a Brexit, we see two major implications for GCC businesses and investors with operations or interests in the UK. Firstly, the valuation of the British pound and how this impacts inward investment. Secondly, the impact on GCC trade agreements.

On May 13, the IMF published a report highlighting that a vote for Brexit would precipitate a “protracted period of heightened uncertainty, leading to financial market volatility and a hit to output”. The pound has already been the weakest performer among the major currencies so far in 2016, but in the event of a Brexit there is potential for it to be much weaker. So what does this mean for businesses locally? If the pound, as forecast, takes a dramatic fall in the first three months post-Brexit, is this necessarily a bad thing for GCC investors?

Unlike other regions, GCC investments into the UK are, for the most part, not made with the motive of accessing European markets, so if the sterling weakens further, GCC investments into the UK may begin to look much more attractive and actually offer an exceptional opportunity to purchase UK assets cheaply. With the amount of UAE investment into the UK already substantial, a depreciation of sterling could see a significant increase in the volume of investment into the UK.

The second issue is potential impact upon the bilateral trading landscape between the GCC and the UK. In October last year, the UAE and Britain set a new target for bilateral trade that would more than double its current value to £25 billion (Dh135.24bn) by 2020. This would not necessarily be affected by a Brexit. Why? The EU has been unable to reach a free trade agreement with the GCC, despite negotiations going back to 1988, meaning that in theory the UK could strike beneficial bilateral trade deals with GCC governments, even if it were to leave the EU. Additionally, the UK only last month signed a Double Taxation Agreement with the UAE, demonstrating that bilateral deals might actually be preferred and more easily achieved.

To conclude, there are obviously pros and cons to both eventualities but, given the significant noise around the negative implications of a Brexit it is worth noting the potential opportunities that may arise for GCC investors and businesses if the UK does decide to leave the EU. With so much claim and counterclaim, trying to ascertain the impact that change in Europe would have on the business community in the Middle East is a daunting challenge.

However, in order to ensure impact and businesses disruption is kept to a minimum, regional companies and investors should be aware of the planning that can be done ahead of time, even now, and not lose sight of the potential opportunity as well as challenges that come with possible change.

Patrick Gearon is the head of the Middle East region for the Law firm Charles Russell Speechlys.

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