The UK’s decision to leave the EU caught the financial markets by surprise and drove them to a period of real uncertainty. The unexpected results led to a broad sell-off across continents and asset classes. Because the UK is the fifth-largest economy in the world, it is critical that the Brexit process be carried out in an efficient and timely manner. Brexit is a huge change in many aspects, and it is going to draw a new map in terms of global commerce.
Companies in the GCC invested heavily in the UK to gain profits from the opportunities in the UK itself, but they did not look at their investments in the UK as a tool to enter the EU markets. This trend is based mainly on the historical relationship between GCC countries and the UK. As a result of Brexit, new GCC companies are expected to grow their operations toward the UK, and existing ones will enhance their operations.
International investors, including those in the GCC, used to appreciate the level of business transparency that regulatory bodies in the UK imposed. The UK market is always looked at in the Gulf as clear, strong, transparent and ethical. The business scene will continue as usual in the UK because in reality the Brexit process will not happen overnight. The bureaucratic upheaval involved and the procedural changes that will come once Article 50 is triggered will lead to a gradual process of changes to legislation and regulation. This evolution will unfold in the months and years after Article 50 is triggered. Small and medium-sized enterprises should keep their eye on the ball as adaptability and stability are very important at this time.
SIGNIFICANCE OF BREXIT: In order to assess Brexit, we must compare equity volatility levels over the years. The equity volatility index implies an anxiety level that is much lower than the ones witnessed recently, such as Chinese yen devaluation or the scare in February 2016 when the US Federal Reserve announced that it would not rule out negative interest rates after the Bank of Japan introduced negative rates.
OBG would like to thank KSI - Bahrain for its contribution to THE REPORT BAHRAIN 2017 IMPACT ON THE GCC ECONOMY: Britain’s potential exit from the EU has added a greater level of uncertainty that could further dampen global economic growth by delaying capital expenditures and sapping global consumer confidence. For the oil and gas sectors, the impact will be minimal since Britain is responsible for only 1.6% of total global consumption.
The more serious impact would be if Brexit inspired other countries to leave the EU. Further, as capital shifts into safe haven assets such as US Treasuries, it would lead to further strengthening of the US dollar. Eventually, a stronger US dollar would make imports from Britain less expensive as most of the GCC currencies are pegged to the US dollar. Historically, GCC consumers have imported a large quantity of luxury goods from UK manufacturers, which would all become less expensive. Capital equipment imports from Britain for other sectors — such as telecoms and power — would also become less expensive, and the uncertainty caused by Brexit should act as a headwind to global growth, particularly in the US. As a result, the US Federal Reserve could delay increasing its rates.
PROTECTIONIST POLICY TO THE FORE: One of the important implications of the vote is that the positive effects of globalisation have not trickled down to many workers. The growing inequality — especially for low-skilled workers who have suffered due to technological advances that resulted in a plateauing of labour productivity — has led to frustration among the voting majority. They largely feel threatened by trade and immigration policies, and fear their jobs are either being replaced by immigrants or outsourced to people in emerging countries. A backlash against globalisation does not bode well for emerging markets and in particular GCC economies, as they have largely benefitted from free flow of capital, labour and goods.
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