Brexit, the GCC impact: Why oil is silver lining on economic cloud

GCC credit spreads are expected to widen on heightened risk aversion and falling oil prices in the wake of Friday’s Brexit vote. (Supplied)

In the aftermath of Brexit, uncertainty is the only certainty.

Though the negative impact – or positive if there’s any – of the Britons’ decision to pull out of European Union is unclear, but every region – or every country for that matter – is evaluating the impact of Brexit on their currencies, banks, industries and overall economies.

GCC analysts are also busy churning out analysis on the impact of Brexit on the region – especially the decline in the value of pound versus US dollar – because the regional currencies are pegged to the greenback – and the interest rate. Most of the economists, however, believe there will be no major impact from the unexpected crisis.

“We expect Brexit and consequent events to push the US Fed to take a much more dovish view which would result in a delay in the rate rise.

"Given the currency peg of the GCC countries, such an event would be more positive for the GCC countries as lower oil prices have resulted in slower growth and a lower interest rate would be conducive in this scenario,” Kuwait-based Global Investment House said in a note released on Sunday.

“However, from the point of view of the local banks, we see a delay/slower rise in interest rates as a negative, given that this was the main catalyst seen behind their earnings growth trajectory,” Global’s Researcher Naveed Ahmed wrote in the 5-page note.

Given the GCC’s exports to the UK and the EU remain concentrated to the oil and energy related products, Global stated that any slowdown in the respective economies on account of the Brexit, may lead to further pressure on the price of oil.

While oil has already reacted in anticipation to this, the realisation of an actual slowdown will be negative.

On Friday, June 24, when the Brits voted their country out of EU bloc, the panic wiped off $ 2.4 trillion of world markets across Europe, US and Asia. In fact, some economists predicted that Brexit vote will push UK into recession.

Similarly, the pound declined by 3.7 per cent in the five days after 20 February 2016 when the referendum was announced.

However, from February 26 to June 22, the pound strengthened in value by 7.3 per cent. This came about as amongst other factors, referendum surveys and polls indicated a comfortable lead for the “Remain Campaign” until the last few days when the “Leave campaign” started gaining ground. However, even on the day of referendum the pound saw an increase in its value in intra-day trade as there was across-the-board consensus for a win for the “Remain Campaign”.

Later on, the referendum results in favor of the “Leave Campaign” came as a surprise and the pound declined by eight per cent.

Global researcher believes that property investments in the UK have seen marked interest from investors from the GCC over the past few years. Investors from the UAE accounted for more than 20 per cent of buy-to-let property sales in the UK in 2015, as per London-focused real estate agency Chestertons.

While asset managers and investors in the GCC might see their existing investments in the UK get devalued and/or their yields eroded due to a weaker pound, weaker prices and cheaper currency also offers an opportunity for investors to take advantage of.

Dubai-based Emirates NBD bank stated in a note that the GCC credit spreads are expected to widen on heightened risk aversion and falling oil prices in the wake of Friday’s Brexit vote.

Moreover, downgrades to global growth forecasts, it claimed, would negatively affect crude prices and weigh on GCC credit spreads. Renewed uncertainty owing to Brexit could also cause delay in regional GCC bond issuance.