Regional economies are braced for the effect of the UK’s surprise vote to leave the European Union, which could have far-reaching implications for trade and commerce.
As the initial shock wears off, hundreds of thousands of Europeans living in the Arabian Gulf are assessing what it means for their personal finances, while big business from banking to retail and real estate assesses how discretionary spending and investment could be hit.
“For now, we see some aspects unfolding that could affect the region. [That includes] a weaker euro and GBP, which could affect discretionary spending and purchasing power, including tourism,” said Allen Sandeep, the director of research at Naeem Brokerage in Cairo.
Mr Sandeep says the region must wait to see “whether this would directly translate to sustained weakness for crude oil, hurting hydrocarbon revenue for the Arabian Gulf.”
While the initial reaction to the result sent UK and global stocks into freefall and caused a sharp drop in the pound to a 31-year-low in the currency markets, the Central Bank of the UAE stated yesterday that because of limited dealings between the UAE and UK financial systems, there were only a “few channels through which uncertainty about future UK and EU relations could affect the UAE financial institutions”.
“Banks based in the UAE do not depend on foreign interbank markets to fund their balance sheets, with their consolidated net foreign interbank position being positive,” the statement said, adding that the Central Bank would continue to “monitor ... developments that could effect the UAE economy.”
Tim Fox, the chief economist and head of research at Emirates NBD, said there would be “no direct implications” of Brexit on the UAE and Arabian Gulf economies.
“But there could be some indirect ones, in particular related to GBP,” he added. “A weaker UK economy may deter some inward investment into the UK, including from the GCC. Brexit may also cause the Fed to delay raising interest rates, which would delay tighter monetary policy in the GCC. However, this is not certain.”
In a precautionary measure over the UK’s exit from the EU, the governor of the Saudi Arabian Monetary Agency (Sama), Ahmed Al Khulaifi, said that Sama had made “some adjustments” following turmoil in the financial markets. He said the agency has revised its investment policy after the Brexit vote in terms of euro-denominated assets and those linked to the pound.
However, he said that it was “too early to judge” the lasting effect of the exit of the UK from the EU, adding that for the banking sector, “we expect that the effect will be limited”.
Shailesh Dash, the chief executive and board member of Al Masah Capital, offers similar sentiments, saying that while Brexit was significant for the EU and “the phenomena of single markets”, he believes any negative effects on the region will be short-lived.
“Impact on the GCC if any will be very short-term, particularly the financial markets and currencies,” he said. “But in the mid and long term it would have no effect on the GCC markets, including UAE.”
As the result of the referendum became clear, the value of Sterling tumbled from US$1.48 on Thursday night, touching US$1.36 before closing down about 8 per cent at $1.37 on Friday. The euro also fell dramatically on Friday, declining 3 per cent in trading to close at $1.10, down from $1.13 on Thursday to reach its lowest level since March.
“This will help in increasing the remittance volume to the UK out of the UAE,” said Promoth Manghat, the chief executive of UAE Exchange.
“[The] Indian Rupee has also depreciated as the GBP weakened, which could impact remittances to India positively.” While the sharp drop in the pound’s value on Friday led many opportunistic British expatriates to cash in at their local exchange house, there are other ramifications too.
“A weaker GBP/EUR and a stronger USD will affect tourism and real estate as the UK and Europe are major sources for both these sectors,” said Mr Manghat.
A fall in the value of the pound may also delay a recovery in the Dubai housing market, estate agents predict.
According to the Dubai Land Department, last year British buyers accounted for Dh10 billion worth of property transactions in the emirate, making them the second largest group of non-Gulf investors after Indians.
After property prices tumbled by between 13 and 15 per cent over the last 18 months, brokers have been waiting eagerly for signs that the housing market has bottomed out and will start to climb again.
“With the pound now worth less than it was a week ago, the UAE is likely to be a less-attractive option for UK based investors, who are traditionally one of the top three categories of overseas buyers,” said Craig Plumb, the head of research at JLL’s Dubai office. “It’s definitely going to have a negative effect.”
“We originally predicted that Dubai house prices would stabilise this year and start to increase from 2017 onwards,” he added. “The recent rally in oil prices had led us to think that that increase could have come slightly sooner than expected but the fall in the pound is likely to cancel that out.”
Here are some comments from industry experts and analysts regarding the British vote to leave the European Union:
Hospitality
Brexit will not dampen the immediate travel plans of residents from the United Kingdom, which is among the top five source markets for tourists heading to the UAE, according to analysts.
The dirham is still a more favourable currency than the euro, even with the weaker pound, said Filippo Sona, the head of hotels for the Middle East and North Africa region at the research firm Colliers International.
“A week in Dubai is more affordable than a week in Europe.”
It is too early to see what effect Brexit will have in the longer term on the tourism industry, said John Podaras at the hospitality consultancy Hotel Development Resources in Dubai.
“It is likely that it will have a negligible effect this year as most holidays have already been budgeted, booked and paid for,” he said.
The pound touched 1.36 to the US dollar on Friday, falling 8 per cent over the previous day, on the referendum result. – Sananda Sahoo
Oil
The British decision to exit the European Union sent global oil prices down by 4.91 per cent to US$48.41 a barrel on Friday, threatening to curtail a three month long rally as investors rushed to put their money into safe havens such as the US dollar and gold.
The dollar spiked nearly 2 per cent against a basket of 10 global currencies measured by Bloomberg, making it more expensive for investors in other currencies to buy dollar denominated assets.
Some analysts predicted that global oil prices could fall further in the coming days towards US$45 a barrel or lower – something that would be likely to further hit UAE economic prospects – as investors become more risk averse in the light of the British vote.
Richard Buxton, head of UK equities and chief executive of Old Mutual Global Investors said that Friday’s price fall “suggests expectations for a marked decline in global demand.” - Lucy Barnard
Property
For the thousands of UAE residents investing in UK property, the fall in the value of the pound on Thursday wiped out years of capital gains in just a few hours.
According to Cluttons, buyers from the Arabian Gulf will find the price of an average prime Central London residential asset US$96,000 less than it was on June 20.
However, the fall in sterling is also likely to act to encourage more Middle Eastern buyers into the market, the agent predicts, as buyers look for safe havens such as London bricks and mortar.
“Conversely, London residential property is now US$96,000 cheaper for international buyers looking to enter the market,” said Faisal Durrani, the head of research at Cluttons. “Those from the Gulf eyeing up a London residential asset will find it 31 per cent cheaper than it was during the last market peak in the third quarter of 2007, suggesting that we may be on the cusp of a significant resumption in property investment activity in the British capital.”
Liam Bailey, the global head of research at Knight Frank, said Gulf property investors should expert a “period of renewed uncertainty” in the prime London residential market.
“While a further weakening of the pound could increase inward investment, this impact will be constrained by the fact that about 80 per cent of central London buyers are UK residents.” – Lucy Barnard
Retail
The retail industry in the UAE and the Arabian Gulf could take a hit if the long-term spending powers of UK visitors are affected.
“It is self-evident that a weaker British economy, and especially a weak pound against the dollar, will result in a reduction in the UK [tourist] spending capacity if they do come over here,” said John Podaras at the hospitality consultancy Hotel Development Resources in Dubai. “The markets are so jittery at the moment, there is no way of telling where the pound or the FTSE will be in September, let alone over the next couple of years.”
There is a time limit of two years for negotiation of the UK’s exit from the euro zone, and renegotiations of the treaties may rumble on for the next decade, he said.
As there is no precedent to such an event in recent times, the real impacts are yet to be assessed, said Allen Sandeep at Naeem Brokerage in Cairo. – Sananda Sahoo
Trade
GCC companies will have to wait to discover how the fallout from Britain’s shock EU referendum vote will affect their business.
As part of the United Kingdom’s decision to leave the European Union, the UK will have to negotiate its own trade agreements with other countries rather than as part of the European bloc.
Lawyers say that the UK could strike its own bilateral trade deals with GCC governments. No free trade agreement exists between the EU and the GCC, despite years of negotiations.
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 (Dh135.2bn) by 2020.
“The main problem for our clients is uncertainty,” said Andrew Wingfield, the regional head for the Middle East at Simmons & Simmons. “At the moment there will be no change for companies located in the EU and for those located in the UK there should be no substantive change for at least two years.” – Lucy Barnard
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