It’s a post-Brexit world, so what does this mean for Gulf countries and other emerging markets?
On the upside, the GCC can now treat the UK and European Union as separate trading blocs, which offers new opportunities to boost trade relations. Several steps have already been taken towards this new economic reality.
As the GCC accounts for $50.8 billion (Dh186.59bn) of the $57.2bn in the UK’s annual trade with the Middle East, there is a massive incentive to improve ties further and even put new comprehensive free trade agreements in place.
Free trade agreements may be some way off yet given the complexities of these types of deals. Still, post-Brexit, the UAE and UK were quick to recommit to stronger trade ties. This will prove advantageous given that the UAE becomes the UK’s fourth-largest trading partner now that the relationship with the EU has changed.
Previous efforts to negotiate a Gulf-EU free trade agreement have made little progress but that could change given the new circumstances. The EU now views the UK as a separate entity so it's natural for it to view the UK as a new competitor for Gulf markets. This could mean more incentives to reach a free trade deal in the form of a customs union agreement, for example. However, at the time of writing, there is little development around this idea.
Still, building trading ties between the GCC and the EU would be positive for the Gulf’s regional economic growth. The same goes for GCC-UK ties. The prospect of more trade between the blocs would dovetail with recent economic trends like diversification beyond oil and technological innovation in Gulf countries such as the UAE and Saudi Arabia.
There are certainly advantages for the EU and UK given the slowdown in China’s economy and recent risks arising from the Covid-19 outbreak. The EU and UK’s economies have recently slowed due to China’s declining growth and they need to develop export markets elsewhere. While the Gulf region is much smaller than China’s market, it is still a significant and wealthy market because of the oil and gas resources contributing to its gross domestic product.
At the same time, oil and gas revenue in the Middle East face challenges because of weaker global demand amid a global slowdown. The International Monetary Fund believes GCC countries must stay on track to accelerate reforms and diversification in order to boost fiscal revenue in the coming years.
The GCC could improve its resilience to global economic headwinds by continuing to focus on developing other sectors like technology and financial services such as blockchain.
Stepping up trade deals between GCC countries and the EU and UK would create new export opportunities and help to support fiscal revenue.
In addition to the mature markets of the EU and UK, if GCC countries look over to Asia as an export market, it would be a positive sign that China is adapting quickly to its slowdown and introducing different types of monetary policy stimulus. China is the leading importer of oil from Saudi Arabia, meaning it is imperative for oil revenue that China manages its economy well.
The fact China is negotiating towards a full trade deal with the US and supporting its economy through monetary policy is good for the GCC, which relies on its export markets.
Emerging markets like the GCC countries could gain considerably from bigger trade deals with the EU and UK now that they are separate trading blocs. This is especially true if you consider the traditional oil export market for the Middle East used to be the US. That scenario has also changed now that the US is determined to reach energy independence and is now even a competitor to oil sourced in the GCC.
All things considered, it looks increasingly likely that alternate markets such as the EU, UK and China are set to be the main drivers of oil revenue growth for the GCC countries in the medium-to-long term future.
Hussein Sayed is the chief market strategist at FXTM