There are many layers of autopsy to dissect on the surprise vote for the exit of the UK from the European Union (EU) on the June 24, including the knock-on impact on global energy markets and the new economic opportunities for the Gulf countries. The immediate impact of the UK’s squeezed 52% majority to leave the EU was swift and significant. Many financial institutions and investors who had bet against a ‘Leave’ vote were blindsided and the FTSE 100 closed the day at 3.2% lower and the pound sterling fell to its lowest value since 1985.
What short and long-term impact will the divided scenes playing out in the UK’s political corridors have on the UAE? The Central Bank of the UAE said “due to the limited interconnectedness between the UAE and UK financial systems, there are only few channels through which uncertainty about future UK and EU relations could affect the UAE financial institutions.”
Yet, on the 26 June, the Dubai Financial Market (DME) General Index opened 4.7% lower — the sharpest fall in a single day of trading in six-months. Plus, the uncertain outlook created by Brexit depressed the already low oil prices for nearly a month, which does little good for the robustness of the UAE and wider Gulf’s financial markets. However, the UK’s decision to leave the EU has only had a short-term impact on the oil market. The oil price has pushed above $50 per barrel in a rare move this year as concerns over the larger-than-expected drawdown in US crude inventories and potential operational crises in Norway and Venezuela take center stage.
Sectors in the UAE that are likely to be most affected on a longer-term basis by the UK’s political shift include real estate and tourism, as a weakened pound sterling and euro negatively affect holiday spending and property purchases in both the UAE, UK and wider Europe.
The pound sterling has already shown signs of recovery, which is not entirely noteworthy considering the significant potential for upward movement after a three-decade low just ten days ago. Still, the gradual recovery of the currency suggests that the domino effect of falling share prices on the UAE’s financial markets is temporary and not the start of a recession in the UK. Campaigners fighting to remain within the EU had flagged this up as a particular concern and it would and still could have considerable ramifications on the UAE’s economy and trade market.
But, while the UK’s economy remains stable, Brexit will remain good news for the quarter of a million British expatriates living in the UAE who benefited from the weaker pound sterling against the dirham. It is not such good news for the minority of British expatriates who are paid in pound sterling for their work for British-based companies, with such employees likely seeing a sudden and disproportional drop in wages. Falling wages combined with the high cost of living in the UAE could force some highly-skilled expatriates to pack up and head home, which would not be welcomed news for the UAE’s economic growth plans. Dubai, for example, hopes to emerge as a pivotal hub in the global economy by 2021 —local and foreign expertise forming the crux of the strategy.
Brexit has the potential to create a new local and global identity for the UK. While the UK’s leadership is unclear — exacerbated by Prime Minister David Cameron’s resignation on June 24 — there is also a silver lining. The UK, a country long beset by political apathy, has spoken and economic growth is on the horizon as long as the country sets aside its divided opinions.
Brexit could provide a golden opportunity for the UAE and fellow Gulf countries that want to deepen their relationship with the UK — a globally respected ally in the West — and participate in economic areas previously closed off to them. For example, GCC countries have been attempting to negotiate Free Trade Agreements (FTA) with the EU since the late 1980’s, which the UK may now be more willing to facilitate on a bilateral basis.
The UAE and wider Gulf can gain from the UK’s position as one of the world’s strongest economies by supporting the country as it deepens its considerable clout with international and multi-lateral institutions. Will the UK’s phoenix rise from the ashes and if so, what opportunities can the UAE and wider Gulf seize upon?
* Sean Evers is managing partner,
Gulf Intelligence.
Sean Evers
