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Brexit to have limited credit impact on GCC sovereign wealth funds

The outcome of Brexit will have less than feared credit impact on the GCC sovereigns thanks to their limited trade exposure to the UK, according to credit rating agency Moody’s Investors Service.

 

The large and well diversified sovereign wealth funds of the countries in the region could also offer resilience against potential fluctuations in the value of some assets, Moody’s states.

 

It further said that the nature of the wealth funds will allow the sovereigns to absorb the impact of asset price and exchange rate movements associated with Brexit.

 

While the combination of Brexit and low oil prices could affect GCC investment inflows into the UK, Moody’s notes that overall GCC government investments are generally sticky because of the sovereign wealth funds’ relatively long investment horizon.

 

The agency also said the UK’s investment in the GCC is unlikely to slow as most of the London’s FDI in the GCC is in the hydrocarbon sector, which is unlikely to be materially affected by Brexit.

 

However, Moody’s warned that banking sector retrenchment may present moderate risks, with the UAE (Aa2 negative) and Qatar (Aa2 negative) being vulnerable in the event of a retrenchment of the UK banks from the region.

 

The trade between the GCC and the UK has remained modest and as the energy demand from Asia rose the Arab region’s export shares to both the UK and EU have declined over time.

 

In 2015, GCC trade with the UK accounted for only 2.7 per cent of the region’s global trade.