Brexit will not have major impact on GCC sovereigns – Moody’s

The United Kingdom’s vote to leave the European Union will not have a significant credit impact on GCC sovereigns, ratings agency Moody’s has said in a new report.

The GCC states’ trade exposure to the UK is limited and the size of their sovereign wealth funds offers resilience against potential fluctuations in the value of some assets, the report said.

“It is unlikely that a loss in value of some existing GCC investment in the UK will materially weaken GCC governments’ net asset position,” Moody’s stated.

GCC sovereign wealth fund portfolios are generally large and well diversified. This will allow it to absorb the impact of asset price and exchange rate movements associated with Brexit.

While banking sector retrenchment does present moderate risks, with the UAE and Qatar especially vulnerable, the risk of a sudden scale-back in operations is limited, the report said.

Stocks have also proved relatively stable through past shocks.

Also, because of Brexit, GCC banks which are looking for alternative sources of funding to compensate lower government deposits are unlikely to receive new external funding from the UK, the report added.

Regional lenders’ net foreign assets halved in 2015, from $109bn to $55bn, showing 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, Moody’s stated.

“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,” the report said.

Trade between the GCC and the UK is modest – trade between the two regions last year accounted for only 2.7 per cent of the GCC’s global trade.

GCC exports to both the UK and EU have been declining over time, as energy demand from Asia has increased.