The unexpected decision by the UK on 24 June to leave the EU has sent shockwaves around the world, and the consequences of the ’Brexit’ vote will be felt for years to come. 

The Brexit vote has caught policy makers and business leaders in the Middle East by surprise and the first question all of them will have been asking themselves is: “How does this affect me?”

The short answer is: “Not much.”

In the short-term at least.

The British decision to leave the EU will have very little immediate, direct impact on economic policy, business deals or projects in the Middle East, as regional contracts and transactions are largely done in dollars, even where the UK government is providing export credit support.

Further, UK-EU relations are of little relevance to economic policy in the region, although regional security potentially could suffer if there is any breakdown in coordination between UK and EU security agencies.

Over the longer term however, the increased political risk from Scottish independence from the UK, further EU exits, a weakened EU economy and even the collapse of the EU itself, adds significant new uncertainty to the global economic landscape that will impact the region.

Short term

The most immediate and obvious impact of Brexit on the Middle East is on oil prices, which fell about 6 per cent on the Brexit news to about $48/barrel rent.

Volatility in the oil markets will countinue but is likely to be little more than a short-term reaction to the surprise decision rather than a structural fall as the supply/demand fundamentals are unaffected in the short term by this.

We are still looking at a rebalancing of the oil markets with an equilibrium price in the region of $50/barrel for the rest of the year and into 2017, possibly climbing higher but with ongoing volatility as a result of pressures on both the demand and supply sides.

Currency market volatility will affect some businesses in the region, particularly UK-based companies, which will fell the impact of Sterling losing value against the dollar.

This mostly affects UK-based firms as most business in region is done in dollars, or in currencies pegged to the dollar, which are then converted back to their home currencies.

UK exporters will benefit from a weaker pound as it will make British products and services more competitive. UK companies will also gain from the increased value of earning revenues in dollars.

On the downside however, with the Middle East market now in Year Two of a deep recession, UK companies in the region will face increased costs due to the stronger dollar and their P&L accounts will be negatively impacted by the increased value of any outstanding dollar-based receivables.

This will put pressure on regional cash flow for UK companies in the region, and could potentially result in them delaying outgoing payments and cuts to non-business critical spending.

Regional tourism could be hit by a fall of in visitors from the UK, who will be deterred by the relative increase in cost of visiting the region. This will be most significant to the popular destinations for UK tourists including Dubai, Jordan, Egypt.

Medium term

Between now and 2018, when the UK will officially split with the EU, the biggest impact on the Middle East from Brexit will come from the impact on the global economy, which will define oil prices and the volume of trade through the Gulf and through the Suez Canal.

Turmoil in the UK’s financial sector will disrupt capital markets Europe and elsewhere and could trigger a slowdown in EU growth that would weaken global growth. This could trigger a new global oversupply of oil, thereby forcing further falls in oil prices in 2017 and 2018. Any weakening of the Euro and in Sterling would strengthen the dollar, which would also add downward pressure to oil prices.

The result would be a fall in regional oil revenues, which would add further pressure to regional finances and would be likely to extend the current spending cutbacks and placed further pressure on regional liquidity. In reality, this would merely accelerate current reform programmes already underway.

The weaker pound will make Britain more attractive as an investment destination for the Gulf investors, both sovereign and private, although the immediate impact could be delays in investments due a premium being placed of UK financing investment due to increased political risk

Beyond 2017

Over the long term, UK trade with the region could benefit significantly as a result of Brexit.

Relationships between the UK and Middle East run very deep and many predate the EU relationship with the region.

The UK is well positioned to develop those relationships on a bilateral basis. At the moment the UK cannot negotiate bilaterally with the region in order to allow EU to negotiate with the region as a bloc. EU-GCC trade negotiations have been stalled since 1988 however, so there is an excellent opportunity for the UK to increase its presence.

Additionally, should Brexit see greater devolution or independence for Scotland or Northern Ireland, trade promotion activity from the British Isles will increase while a weaker pound will make the UK companies more competitive.

Set against this however is that the UK, as an individual state, will be in a weaker negotiating position than the larger, more influential EU trade bloc.

The immediate consequences of the Brexit vote could be quite painful for some UK companies and citizens in the region. But in the long run, UK business in the region could come to see their ‘Independence Day’ as the rebirth of British business in the Middle East.