(MENAFN- Khaleej Times) Britain's vote to leave the European Union will not have a significant credit impact on the GCC sovereigns because their trade exposure to the UK is limited and the size of their sovereign wealth funds, or SWFs, offers resilience against potential fluctuations in the value of some assets, Moody's Investors Service said.
The ratings agency argued that given GCC's large investment buffers and limited trade with the UK, the exit from European Union a will have negligible credit impact. "It is unlikely that a loss in value of some existing GCC investment in the UK will materially weaken GCC governments' net asset position," Moody's said in a report. "GCC sovereign wealth fund portfolios are generally large and well diversified. This will allow it to absorb the impact of asset price and exchange rate movements associated with Brexit," said the report, entitled "Sovereigns - Brexit and the Gulf Cooperation Council: Negligible credit impact given large investment buffers and limited trade." It noted that while the combination of the Brexit and low oil prices could affect the GCC investment inflows into the UK, overall GCC government investments are generally sticky because of the sovereign wealth funds' relatively long investment horizon. Moody's asserted that the UK investment in the GCC is unlikely to slow as most of the country's foreign direct investment in the GCC is in the hydrocarbon sector, which is unlikely to be materially affected by Brexit. "Banking sector retrenchment presents moderate risks, with the UAE and Qatar vulnerable in the event of a retrenchment of UK banks from the region. Nonetheless, the risk of a sudden scale-back in operations is limited and stocks have proved relatively stable through past shocks," the report said. Noting that trade between the GCC and the UK is modest, the ratings agency said GCC export shares to both the UK and the EU have declined over time, as energy demand from Asia has increased. In 2015, GCC trade with the UK accounted for 2.7 per cent of the region's global trade. Gulf Development Company, an Abu Dhabi based investment and advisory company, said there is a window of opportunities for business initiatives to acquire cheaper assets and develop new ties with British companies in the aftermath of Brexit. Some analysts are of the view that with the Brexit vote, American as well as Japanese and Swiss banks would be looking into the possibility of moving some of their European businesses out of London to other fast growing financial hubs including Dubai. The GDC said the Brexit would have negative effects on sectors that have strong exposure to the UK as well as to the European market, for example petrochemical, trading, banking and also tourism. Analysts said since the UAE and the GCC currencies are pegged to the dollar, in the medium term, once there will be more clarity and the currency volatility reduce, it will allow GCC investors to acquire assets in the UK for a good price. However, the Dubai real estate is expected to face some pressure from pound decline. Weaker British pound and euro would increase the overvaluation of the GCC currencies and weaken demand for real estate, particularly in the UAE, and also would result in drop in tourist arrivals from the UK and the euro-area, according to Dr Garbis Iradian, chief economist of Institute of International Finance, Middle East and Africa region. -