Brexit to have negligible credit ‘impact’ on GCC

UK investment in region unlikely to slow: Moody’s

FRANKFURT AM MAIN, July 12: Moody’s Investors Service says that the United Kingdom’s (UK, Aa1 negative) vote to leave the European Union (EU, Aaa stable) will not have a significant credit impact on GCC sovereigns because their trade exposure to the UK is limited and the size of their sovereign wealth funds offers resilience against potential fluctuations in the value of some assets.

The immediate impact of Brexit saw the sterling depreciate 10% against the US dollar. If the recent drop continues and if Brexit increases global market volatility, the value of GCC assets in the UK will also depreciate.

The asset size and composition of GCC sovereign wealth funds is not publicly available, which makes it difficult to assess the impact of Brexit on their portfolios. However, recent transactions indicate that GCC funds have invested in various asset classes in the UK, including real estate. In January 2015 the Qatar Investment Authority (QIA) participated in a £2.6 billion ($3.5 billion) agreement to buy the Canary Wharf complex. This follows investments in Harrods in May 2010 for a reported £1.5 billion ($2 billion), The Shard and the Chelsea Barracks, among others. According to the authorities, Qatar’s investment in the UK approached £30 billion ($44 billion)1, which would represent about 17% of QIA’s estimated assets.

The Abu Dhabi Investment Authority (ADIA) has indicated that its investments in Europe represent 20% to 35% of its longterm portfolio, but does not distinguish between continental Europe and the UK. The Kuwait Investment Authority had reportedly $24 billion invested in the UK as of 20122, or an estimated 4% of assets. Nonetheless, it is unlikely that this loss in value will materially weaken the GCC governments’ net asset position. Sovereign wealth fund portfolios are generally large and well diversified, and we estimate that all countries except Bahrain will continue to maintain strong net asset positions despite the oil price drop and Brexit combined.

Most of the UK’s foreign direct investment in the GCC is in the hydrocarbon sector, and is unlikely to be materially impacted by Brexit. However, British investment in non-oil sectors could slow. For example, the UK is the single largest source of foreign direct investment in the UAE (13.2% of total FDI stock, or about 2.5% of GDP)5 and in Oman (46.0% of total FDI stock, or about 10.0% of GDP).

6 British citizens are also the secondlargest buyers in Dubai’s real-estate market, having invested £1.9 billion ($2.6 billion) in 2015.7

ISTANBUL, July 12, (RTRS): US businesses, Britain’s biggest foreign investors, largely factored in the vote to leave the European Union and now want to see exit talks progress slowly, a top executive at the US Chamber of Commerce said.

Investment from across the Atlantic will slow sharply as companies gauge the fallout, Myron Brilliant, head of international affairs at the biggest US business lobby, said in an interview late on Monday in Istanbul.

“You will see minimal investment going to the UK in the short term, (then) a watchful period to see how Britain and Europe negotiate the exit,” he said, adding US investors now want to see Britain at least remain part of the EU trade bloc.

The chamber is widely viewed as part of Republican establishment but has clashed over trade policy with both the Democrats’ Hillary Clinton and Donald Trump, the presumptive Republican candidate for President in November elections.

The pound has plunged to a three-decade low since the Brexit vote, and investors have warned that Britain, until now the world’s fifth-largest economy, faces years of economic uncertainty.

Brexit also upended Britain’s political order. After party rivals all dropped out, Theresa May, 59, emerged as the next

Additionally, financial sectors in the UAE and Qatar are vulnerable to a retrenchment of UK financial institutions, which have significant activities in the GCC region. According to BIS data, UK bank exposure to Bahrain and the UAE was particularly high, at 23.9% of GDP and 16.6% of GDP, followed by Oman (10.3% of GDP) and Qatar (7.9% of GDP). When looking at short-term exposure of BIS banks, Bahrain (10.9% of GDP), UAE (4.9% of GDP) and Qatar (3.6% of GDP) are moderately vulnerable to a sudden stop in investment.

Nonetheless, the risk of a sudden scaleback in operations is limited and stocks have proved relatively stable through past shocks. Both short-term and total claims of UK banks in GCC countries have been stable throughout the global financial crisis, for instance. In the case of Bahrain, the figures are inflated by its large offshore banking sector, which does not present a direct systemic risk for the government.

Uncertainty associated with Brexit is likely to limit the availability of new funding to invest in GCC countries. This comes at a time when lower government deposits lead GCC banks to look for alternative sources of funding. GCC banks’ net foreign assets halved in 2015, from $109 billion to $55 billion8, illustrating an increased reliance on external sources of funding. Brexit may also restrict the availability of UK bank financing at a time when GCC sovereigns face greater borrowing requirements, although this is unlikely to affect their liquidity positions. Recent debt auctions by GCC sovereigns attracted diversified investor interest and were significantly oversubscribed.

Despite the added short-term volatily in oil prices triggered by Brexit, we expect its impact on GCC economies via the trade channel to be limited. GCC trade with the prime minister, to take office on Wednesday.

She will now lead divorce proceedings with the EU under Article 50, the formal mechanism for leaving the bloc.

“The incoming prime minister will want to go slow. She will be under pressure from European leaders to move faster, but I suspect she will not invoke Article 50 until she absolutely has to,” Brilliant said in an interview late on Monday in Istanbul. “It is the wise course of action for her.” Washington backed Britain in the EU and worries its departure will hit the global economy. US companies, especially in the financial industry, that have used London as an entry point to the EU are likely to shift some jobs to Frankfurt and other continental capitals, because Britain will no longer serve as a regional hub, Brilliant said.

“The goal I am sure will be to stay in the single market, which will be less disruptive. But to do that, the British are going to have to make concessions, particularly on immigration.”

Brexit is not “a death knell” for the Transatlantic Trade and Investment Partnership (TTIP), which seeks to reduce regulatory barriers, but it will slow talks and makes a deal this year unlikely, he said. Britain was a proponent of TTIP.

UK only accounted for around 2.6% of the region’s global trade between 2005 and 2014 (or 2.2% of total GCC GDP), whereas trade with the EU (excluding the UK) accounted for a higher share of 12.8% of its global trade (11% of GCC

GDP). In 2015, GCC trade with the UK accounted for 2.7% of the region’s global trade (2.2% of GDP), while total trade with the EU (excluding the UK) amounted to 12.7% of global trade (10.6% of GDP).

The bulk of the GCC’s exports are in oil-related goods while the bulk of imports are non-oil goods. In the decade preceding the current oil price downturn, around 70% of the GCC’s UK destined exports were oil-related, while 65% of exports destined for the EU (excluding the UK) were oilrelated. Even if there were a decline in oil import demand in the UK, the GCC’s oil export volumes are unlikely to be affected because GCC countries can always divert oil exports elsewhere as oil is fungible.

Moreover, the share of GCC exports to both the UK and EU have declined over time (see Exhibit 7), as energy demand from Asia has increased, particularly in China (Aa3 negative), Korea (Aa2 stable), Japan (A1 stable), and India (Baa3 positive) .

On a net basis, GCC countries run persistent trade deficits with the UK, reflecting the former’s large dependence on the rest of the world for non-oil goods. The bulk of GCC imports from the UK consists of engines, motor vehicles, aircraft, medication, and engineering equipment. A depreciation of the British Pound would boost the relative competitiveness of imports from the UK.

While exports remain an important growth driver in GCC economies, public consumption has increasingly become an equal if not more important driver in recent years. That said, we tend to see a slowdown in public consumption alongside net exports given that much of it is funded by oil receipts, unless the government decides to implement counter-cyclical spending measures.