Middle East weighs economic impact as Brexit uncertainty rolls on
While the EU divorce could be damaging for Britain, the effect on the GCC and wider Mena region will be less stark, analysts say
Anxious Britons are not the only ones waiting as the UK drags out decisions on its potential departure from the European Union – business leaders in the Middle East are also looking for a resolution.
“Our problem is the indecisiveness of the [British] government,” says Sultan Ahmed bin Sulayem, chairman of DP World, which last month acquired UK shipping company P&O Ferries for £322 million (Dh1.5 billion).
“We don’t care, as businessmen, whether they have Brexit, or Brexit with an agreement, or Brexit with a good agreement, or Brexit with a bad agreement,” he says.
But, right now, uncertainty over what deal the UK will strike with the EU, if any, could confuse the markets, the port operator’s chairman said in Dubai last month.
Prime Minister Theresa May has yet to win Parliament’s support for a Brexit transition deal, although she has paved the way for a possible delay to leaving, beyond the scheduled date of March 29.
In the meantime, drawn-out political wrangling is taking its toll on British businesses, which on Sunday reported their weakest growth in nearly six years, according to the Confederation of British Industry.
The UK Treasury estimated in 2016 that foreign investment inflows would be between 10 per cent and 26 per cent lower after 15 years if Britain left
“Overall, the impact on the UK economy would be negative, particularly in the short term, when inflation would rise, UK equities in US dollar terms would decline sharply, and economic growth would slow,” Garbis Iradian, chief economist at the Institute of International Finance, told The National.
The pound sterling depreciated against the dollar from a high of £1.47 on June 23, 2016, the day of the EU referendum in Britain, to £1.31 to the dollar yesterday afternoon UAE time.
However, the economic impact on the Gulf Co-operation Council countries and wider Mena region will be less stark, analysts say. For some industries, such as real estate, the British currency’s depreciation is a boon because it means investors buying in dollar-pegged currencies such as the dirham can pick up discounted deals.
“The opportunity offered by the cheap pound and recent fall in values in London is significant – for many buying from the Middle East, London prices are now 30 per cent lower than they were in 2014,” says Liam Bailey, global head of research at Knight Frank.
Businesses in the Mena region say it was either too early to predict the effect of Brexit on their operations, or that there would be little or no impact, because their trade with the UK is through direct relationships over which the EU has no bearing.
“The negative hype of the issues Brexit may cause in supply chains is totally overblown by the media and vested interest bodies – there will be zero impact to [GCC] trading; why should there be?” says Michael Wright, chief executive of the Emirati and Lebanese units of supermarket chain Spinneys, which has a licensing deal with British retailer Waitrose.
“Lebanon and the UAE are not part of the EU and neither country has a problem trading with the world and the EU, so it will be the same for the UK, whose products go directly to the region.”
Some British products include ingredients sourced from EU countries, Mr Wright says, but these can also be sourced from supply chains all over the world.
Our problem is the indecisiveness. We don’t care, as businessmen, whether they have Brexit, or Brexit with an agreement, or Brexit with a good agreement, or Brexit with a bad agreement.
Sultan Ahmed bin Sulayem, chairman of DP World
A spokeswoman for Dubai-based airline Emirates said it was too early to tell what effect Brexit would have on travel flows to the UAE and beyond.
“Overall, the impact on Mena economies is slightly negative,” Mr Iradian says. “The UK is an important trading partner of the UAE, concentrated in real estate and tourism. While a more depreciated sterling would imply cheaper imports of goods to Mena economies, that will be offset by fewer UK investments and tourist arrivals, particularly to Egypt, Jordan and Dubai, given the pegged exchange rate.”
Last year, the UK ranked third in terms of the number of tourists visiting Dubai, while British investors habitually rank among the top three foreign nationalities buying Dubai real estate.
A 2016 report by Moody’s forecast that the value of GCC investments in the UK may be affected by asset price and exchange-rate movements as a result of Brexit. However, this would have only a negligible effect on GCC sovereigns, given their large investment buffers and limited trade volumes. Moody’s did not supply an up-to-date comment.
GCC trade with the UK accounted for 2.7 per cent of the region’s global trade in 2015. Over the subsequent two years it grew, to £40.1 billion in 2017 – a 14.8 per cent annual average increase.
The GCC is now the UK’s fourth-largest export market for goods outside the EU after the US, China and Hong Kong.
UK imports from the GCC increased by 21.5 per cent since 2016, led by the minerals and hydrocarbons sectors.
“While currency fluctuations may have an impact on some imports, sterling’s fluctuation has boosted the competitiveness of many UK exports and the trade flows between the UK and Middle East remain very healthy,” UK Trade Commissioner Simon Penney says.
A lower pound will encourage more companies to export to the Mena region, he says.
The British government intends to raise exports globally as a percentage of gross domestic product to 35 per cent – from 30 per cent today – and is ready to “adjust resources to maximise opportunities and support any shifts in trade activity”, Mr Penney says.
As part of this, the UK is working with Arabian Gulf authorities to address issues relating to market access.
For example, the UAE is among the top 20 markets for UK food and drink globally, and Britain has been working with the Emirates to ensure UK companies gain insight into UAE food standards and regulations to encourage more products to enter the market.
Trade prospects could be bleaker in the event of a no-deal Brexit, says Samuel Coldicutt, a trade lawyer at Linklaters.
“We live in a world of integrated supply chains – British manufacturers rely on imports to produce their products, and a weaker pound will raise their costs,” he says.
“What is most difficult to predict is how all the elements involved in cross-border trade will be affected by the sudden impact of a no-deal Brexit and how any mitigating actions taken will play out.”
Certainly, on the capital markets front, companies with a large exposure to the euro zone are holding back investment pending guidance on Brexit, says David Meier, an economist at Swiss bank Julius Baer.
However, the potential impact on the FTSE 100 is overestimated, because almost 30 per cent of the market is oil and commodity stocks, for which Brexit is almost irrelevant, he says.
The mixed analyses demonstrate how crucial it is that investors in the Middle East region and beyond receive some clarity on how and if Brexit will happen.
Naeem Aslam, chief market analyst at broker ThinkMarkets, is clear about where the responsibility lies.
“Legislators have to resolve this, as it’s nothing short of a circus,” he says.
Updated: March 5, 2019 09:25 PM