A few days remain before the United Kingdom holds a referendum on 23 June 2016 to decide whether it should leave or stay in the European Union, whereby the British public is split between opponents and supporters of this decision. Opponents of the EU membership believe that Britain is being held back by the EU. They argue that the membership imposes too many complex routine procedures and rules on business and charges billions of Pounds in membership fees for a limited benefit in return. Opponents favoring Brexit (Britain’s exit from the EU) also expressed their intention to reduce the numbers of immigrants pouring into the country as a result of EU policies.
As for Remain supporters, they argue that 3 million jobs in the UK rely on exports to the EU and that remaining in the EU means reduced prices on merchandise due to the current tariff-free and unrestricted trade deal with the EU. Supporters also believe that the influx of young working immigrants to the country promotes Britain’s economic growth.
If Britain is to withdraw from the EU, this decision will certainly have repercussions on the country’s economic ties with its trading partners, including Gulf Cooperation Council countries, and on the volume of Gulf investments in the country.
Status of the Economic Relations between Britain and Gulf States
The economic ties between the UK and GCC countries can be dissected as follows:
1- Trade Volume:
GCC countries have strong trade relations with the UK, which is considered the Council’s second biggest trading partner in the EU after Germany. According to data from the UK Trade & Investment Commission, the total volume of bilateral trade between Britain and GCC countries reached GBP 22.1 billion in 2014 (around USD 33 billion). The value of imports from the Gulf States to the UK exceeded GBP 8.5 billion in 2014, while the UK imports to the Gulf amounted to more than GBP 13.6 billion. In the GCC region, the United Arab Emirates is at the forefront of trading in the UK, followed by Kuwait, Bahrain, Oman, Qatar and the Kingdom of Saudi Arabia.
The top UK exports to the Gulf States include jet engines, cars, gold, aircraft and aircraft parts, jewelry and precious metals. On the other hand, liquefied natural gas, kerosene, jet fuel and crude oil constitute around 70 per cent of the total UK imports from GCC countries.
2- Gulf Investments in Britain:
Over the past few years, many factors have encouraged Gulf investors to direct their investments towards Europe, namely Britain. The main factors include first, the strict restrictions imposed after September 11, 2011, by the United States on foreign capital, especially Arab capital, the freezing of several foreign accounts in US Banks, and the intensified measures imposed on the freedom to travel and enter the country. Second, the decent and safe investment environment offered by Britain that guarantees high returns and welcomes Gulf investments, particularly in the real estate sector.
Third, the turbulences and instability haunting the Middle East mainly after the eruption of the Arab Spring revolutions in 2011, and the decrease in oil prices since mid-2014 have pushed Gulf investors towards foreign countries in a search for safe investments and significant financial returns.
Total Gulf investments in Britain are estimated to be more than USD 130 billion, based on statistics published by the London-based newspaper “Al-Hayat” in March 2016. These investments are concentrated mainly in the real estate sector, where Kuwaiti, Emirati, and Qatari investors bought British real estate for at least GBP 5.9 billion in 2015, compared to GBP 4.8 billion in 2014, according to the global real estate services provider in Britain, Savills.
On the other hand, UK officials are promoting financial services, including Islamic Finance, and are assisting the Arab Gulf States to create a diversified economy. The UK is further attracting more Gulf investments and sovereign wealth fund investments, mainly in infrastructure and energy sectors to maintain London’s stance as the preferred destination for Gulf investments.
These strong economic aspirations were reflected in mutual business visits between the two entities, including the visit of business delegations led by the Lord Mayor of London to Kuwait, KSA, UAE and Bahrain from 16 to 27 January 2016. During these visits, meetings were held with Ministers and officials in charge of the several Sovereign Wealth Funds and DP World. The Lord Mayor of London also visited Bahrain and Oman between 23 and 29 March 2016.
The Potential Repercussions of Brexit
According to the Organization for Economic Cooperation and Development (OECD), if Britain decides to remain in the EU and with further reforms were undertaken in the European Union Single Market, foreign trade and foreign direct investment between the EU and the UK would increase.
However, if the polls come out in favor of Brexit in the referendum held this June, and if the exit is officially implemented by the end of 2018, the country is expected to witness a drop in foreign investments, including Gulf investments, as investors would be more concerned about the difficulties that Britain would face having to review and renegotiate more than 60 trade agreements with the countries of the world, including EU and Gulf States. Among the main potential effects of Brexit would be:
1- The implications on London as a global financial center:
London is a central hub for commercial banks and has dominance over high-level clients and large companies’ funds. Thus, international banks have established their management offices in the British capital to guarantee access to the European market. Therefore, while many foreign entities use London as their main entry point to Europe, cost management might push banks to relocate their offices outside of London if the British Government decides to withdraw from the EU.
Moreover, the impact of Brexit, on local, Gulf, and foreign investments currently present in London, and the capital’s position as a global financial center depends on the trade-off between the quality and pioneering aspect of financial services offered in London and the need to access the European market. Investment flow that is currently directed to automobile factories or financial services centers in the UK, which are the main sectors attracting foreign direct investments in the EU, might be redirected towards EU capitals such as Dublin, Paris and Frankfurt.
2- Risks on the global economy and oil prices:
According to the International Monetary Fund (IMF), the potential Brexit is considered as the biggest risk to global economic recovery and would cause severe damage at regional and global levels. The IMF warned that the UK withdrawal from the EU would disturb present commercial relations and heighten uncertainty amongst investors. Hence, this might sustain the fluctuations in oil prices and aggravate the expected instability in the economic growth of oil exporting countries, including the Arab Gulf States.
3- A drop in Gulf investments in Britain:
Some expect that the EU exit scenario would drag the UK into an economic recession, an increase in unemployment and a plunging GDP, in addition to a decrease in real estate prices and capital value. According to forecasts, real estate prices would drop between 10 to 18 per cent and stock prices would fall by 20 to 29 per cent right after the announcement of pro-Brexit poll results.
Gulf investors are most likely going to reconsider their current investments in the UK, namely in the real estate sector, fearing serious financial losses after the fall in the market. Warning signs of this trend have started emerging in the past months, as many Gulf investors are holding back from new real estate deals, while waiting for the British polls’ final say. According to the real estate brokering firm, Knight Frank, the value of properties in luxury residential areas favored by Gulf investors, such as Chelsea, South Kingstown, and Knightsbridge, has dropped by 3.5 to 7.5 per cent on a yearly basis since last May.
The Governor of the Bank of England, Mark Carney, confirmed in April 2016 that overall flows of foreign capital into commercial real estate sector in Britain stopped in the first three months of 2016 due to the Brexit referendum.
Within the same context, the value of Sterling has fallen against the Dollar. On the first of June 2015, the Pound was trading at 1.5207 against the Dollar and has dropped to 1.456 on 7 June 2016, according to data from the Central Bank. This decline in the Pound to Dollar rate might lead to a decrease in the value of Gulf assets in Britain. The British Government is expecting the Pound to suffer a 15-20 per cent slump if Britain decided to exit the EU, especially if the withdrawal was followed by a “capital flight” outside of the UK.
