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Tourism and real estate could get hurt but it paves the way for bilateral FTAs between UK and GCC countries
Dubai: The UK's decision to quit the European Union plunged the 28-state bloc into the deepest crisis in its history, and is dragging the global financial markets along with it.
According to analysts, the immediate impact of Brexit on GCC economies will be transmitted through currency markets.
The Brexit win has led to sterling reversing initial gains to leave the pound down more than 10 per cent at $1.33, compared with $1.50 just after polling stations closed. That was the lowest since 1985. The pound was down more than 7 per cent against the euro.
Sterling weakness would have potentially both positive and negative effects for regional economies. Depending on how long such currency weakness lasts it could significantly impact on tourist flows to the Gulf, which have already been negatively affected by the weakness of other currencies such as the Russian ruble and the Chinese yuan.
"GCC investments into the UK may begin to look much more attractive considering the exceptionally weak sterling levels that might be seen, representing something of a once in a life time opportunity to purchase UK assets. Unlike other regions GCC investments into the UK are for most part not made with the motive of accessing European markets, but rather they are standalone investments made in their own right, in areas such as real estate and hospitality," said Tim Fox, chief economist of Emirates NBD in a note.
Significant volatility in currency markets is expected in the coming days, which would also likely have a bearing on other asset markets such as commodities, as well as on global monetary policy settings, all of which would have an impact on this region.
"From a more micro perspective as well, regional companies would have to get used to such currency volatility which in and of itself, and almost regardless of direction, could make a strong case for greater use of currency hedging tools requiring regional corporate treasuries to become more sophisticated," said Athanasios Tsetsonis, senior economist at Emirates NBD.
Economists say the bilateral trading landscape between the GCC and the UK may not necessarily be harmed by Brexit. The EU has been unable to reach a Free Trade Agreement with the GCC, despite negotiations going back to 1988 which are currently stalled. In theory at least it may be possible for the UK to strike beneficial bilateral trade deals with regional governments, something the UK may have an incentive to conclude.
Untangling some of the existing frameworks related to British membership of the EU might initially be quite complicated and take time, and there would no doubt be a high degree of uncertainty. Financial market volatility would probably only add to that uncertainty, but once the dust has settled, it may well be that any weakness in sterling will be seen as generating significant new opportunities. Furthermore, extracting itself out of the EU-GCC stalled FTA process may actually breathe new life into the UK's trading relationships with the Gulf, as well as with other parts of the world," said Fox.
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.
"Untangling some of the existing frameworks related to British membership of the EU might initially be quite complicated and take time, and there would no doubt be a high degree of uncertainty. Financial market volatility would probably only add to that uncertainty, but once the dust has settled, it may well be that any weakness in sterling will be seen as generating significant new opportunities. Furthermore, extracting itself out of the EU-GCC stalled FTA process may actually breathe new life into the UK's trading relationships with the Gulf, as well as with other parts of the world," said Fox.
© Gulf News 2016
