Amwal Al Ghad English - 2016-06-26 15:17:44
Middle East stocks dropped sharply on Sunday because of Britain's vote to leave the European Union but Gulf bourses came well off their lows. Egypt was hardest hit because of concern that fund inflows into the country could shrink further.
Most of the Gulf does not depend heavily on foreign capital or non-oil exports, so the main threat to it from Brexit is that slower growth in Europe could push down oil prices; Brent oil sank 4.9 percent to $48.42 a barrel on Friday.
Monica Malik, chief economist at Abu Dhabi Commercial Bank, said that among the six Gulf Cooperation Council economies, she expected the greatest impact of a weak pound and euro to be felt in the United Arab Emirates, because its large tourism and real estate sectors were vulnerable to exchange rate moves.
"We see a weaker private consumption and investment outlook in the UAE following Brexit," she wrote in a report.
She also noted that while Brexit was likely to deter any U.S. interest rate hike for the time being, it could require GCC economies to tighten fiscal policy further to limit the widening of their deficits and protect financial market sentiment.
"Moreover, with the fall in oil prices and elevated global market uncertainties, foreign borrowing rates for GCC entities will likely increase. This will place more pressure on domestic borrowing and potentially push up interbank rates further."
But so far, movements in Gulf forex forwards and sovereign debt insurance costs since the British referendum have been minor, suggesting foreign investors are not for now using Brexit as a cue to speculate heavily against GCC assets.
One-year U.S. dollar/Saudi riyal forwards, used to hedge against the risk of future currency depreciation, barely moved on Friday and Sunday, staying in the range of the past few weeks. High-grade Gulf bond prices moved little.
Five-year Saudi credit default swaps have risen 6 points to 182 points but that is a small move given the volatility in global markets, and CDS are below highs hit earlier this month.
Sebastien Henin, head of asset management at Abu Dhabi's The National Investor, said further selling of stocks in the UAE and Qatar could not be ruled out if Brexit caused risk-averse global funds to cut their allocations to emerging markets in general. But he said a significant fall in demand for oil was unlikely.
"I'm not so pessimistic - the markets face some headwinds, but it's manageable. I'm not expecting oil prices to dive." More»