Brexit seen having limited credit impact on GCC govts

Date

7/13/2016 1:05:25 AM

(MENAFN- Muscat Daily) Muscat-

Moody's Investors Service said the United Kingdom's vote to leave the European Union will not have a significant credit impact on GCC sovereigns because GCC's trade exposure to the UK is limited and the size of their sovereign wealth funds (SWFs) offers resilience against potential fluctuations in the value of some assets.

In a report published on Tuesday, Moody's said if the recent drop in the pound continues and if Brexit increases global market volatility, the value of GCC assets in the UK will also depreciate. But it added that it is unlikely that a loss in value of some existing GCC investment in the UK will materially weaken GCC governments' net asset position.

'GCC 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,' Moody's said.

While the combination of Brexit and low oil prices could affect GCC investment inflows into the UK, Moody's noted that overall GCC government investments are generally sticky because of SWFs' relatively long investment horizon.

Moody's said UK investment in the GCC, on the other hand, is unlikely to slow. 'Most of the UK's foreign direct investment in the GCC is in the hydrocarbon sector, which is unlikely to be materially affected by Brexit.'

However, it said, British investment in GCC's non-oil sectors could slow. Moody's noted that the UK is the single largest source of FDI in the UAE (13.2 per cent of total FDI stock) and in Oman (46 per cent of total).

Moody's said the financial sectors in the UAE and Qatar are vulnerable to a retrenchment of UK banks, which have significant activities in the GCC region.

According to Bank of International Settlements (BIS) data, the UK bank exposure to Bahrain and the UAE was particularly high at 23.9 per cent of GDP and 16.6 per cent of GDP, followed by Oman (10.3 per cent of GDP) and Qatar (7.9 per cent of GDP).

Moody's said the 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. 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.'

Moody's added that trade between the GCC and UK is modest. GCC export shares to both the UK and EU have declined over time, as energy demand from Asia has increased. In 2015, GCC trade with the UK accounted for just 2.7 per cent of the region's global trade, according to Moody's.

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