Manama: The EU referendum tomorrow is one of the most controversial and strongly debated issues in the UK’s political history in the last 40 years, and the people of Britain will make a momentous decision – do they want the UK to remain in the EU?
Law firm Charles Russell Speechlys’ Middle East Region head Patrick Gearon told the GDN that a potential “Leave” vote has major implications for the GCC and the Middle East.
“Clearly the impact of Brexit on the UK economy could be very significant, but it will also have knock-on effects across the rest of the EU, and eventually some of these effects may also be felt in other regions, including in the Gulf,” he said.
According to him, in the eventuality of a Brexit, there would be two major implications to GCC businesses and investors with operations or interests in the UK.
First is the valuation of the British pound and how it would impact inward investment. Second is the impact on GCC trade agreements.
An IMF report published last month said a vote for exit would precipitate a “protracted period of heightened uncertainty, leading to financial market volatility and a hit to output”.
The pound, said Mr Gearon, has already been the weakest performer among the major currencies so far this year, falling more than two per cent against the US dollar, but in the event of a Brexit there is potential for it to be much weaker.
According to him, the expected dramatic fall in the pound in the first three months post Brexit, may not necessarily be a bad thing for GCC investors.
Unlike other regions, GCC investments into the UK are for the most part not made with the motive of accessing European markets, so if the sterling weakens further, GCC investments into the UK may begin to look much more attractive and actually offer an exceptional opportunity to purchase UK assets, he said.
“With the amount of GCC investment into the UK already substantial, a depreciation of sterling could see a significant increase in the volume of investment into the UK.”
The second issue is the potential impact upon the bilateral trading landscape between the GCC and the UK.
The EU, said Mr Gearon, has been unable to reach a Free Trade Agreement with the GCC, despite negotiations dating back to 1988, meaning that in theory the UK could strike beneficial bilateral trade deals with GCC governments, even if they were to leave the EU.
Additionally, the UK has signed a Double Taxation Agreement with the UAE, demonstrating that bilateral deals might actually be preferred and more easily achieved.
He said given the significant noise around the negative implications of a Brexit, it is important to note potential opportunities that may arise for GCC investors and businesses if the UK does decide to leave the EU.
However, in order to ensure impact and businesses’ disruption is kept to a minimum, regional companies and investors should be aware of the planning that can be done ahead of time, even now, and not lose sight of the potential opportunity as well as challenges that come with the possible change, he added.
A report by the National Bank of Kuwait (NBK) is in broad agreement with Mr Gearon.
According to it, Brexit may allow UK to create a joint-trade partnership with the GCC countries.
NBK also said the expected drop in the sterling exchange rate will increase GCC investments in the UK, which is already one of the top investment destinations for the Gulf countries.
The sterling has already showed signs of weak performance since the Brexit poll was announced, dropping by 3.5pc against the US dollar since the start of the fiscal year, and down against the euro by 6.5pc.
The currency will see further losses once the exit is confirmed, the report added.
Meanwhile, NBK said the UK enjoys the lion’s share of the European asset management services, gaining 80pc of investment markets and about 75pc of reserve fund assets.
The exit will cause British companies to lose their shares to other EU rivals, it explained.
In the short term, if the country votes to leave, post-referendum uncertainty would hit business confidence, investment and hiring, possibly tipping the UK into a recession in the second half of 2016, according to the Institute of International Finance (IIF).
In addition, in the near term, a decision in favour of Brexit would put higher risk premiums on UK assets and the cost of funding for UK banks would be expected to rise, at least initially.
The cost of dollar funding for UK banks increased earlier this year to its highest levels since 2013, said NBK.
avinash@gdn.com.bh
&uuid=(email))