The United Kingdom’s vote to leave the European Union will not have a significant credit impact on Gulf Cooperation Council (GCC) sovereigns, said Moody’s report.
The rating agency said GCC sovereign wealth funds have limited trade exposure to the UK and their sheer size offers resilience against potential fluctuations in the value of their assets.
Moody’s latest report, ‘Sovereigns – Brexit and the Gulf Cooperation’, said that sovereign wealth fund portfolios are typically large and well diversified, allowing them to absorb the impact of asset price and exchange rate movements associated with Brexit.
It is unlikely that a loss in value of some existing GCC investment in the UK will materially weaken GCC governments’ net asset position, according to Moody’s. 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.
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. GCC banks’ net foreign assets halved in 2015, from $109 billion to $55 billion, illustrating an increased reliance on external 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. Recent debt auctions by GCC sovereigns attracted diversified investor interest and were significantly oversubscribed.
Despite the added short-term volatility in oil prices triggered by Brexit, we expect its impact on GCC economies via the trade channel to be limited, said Moody’s.
It noted that trade between the GCC and the 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 2.7% of the region’s global trade.