What will be the Brexit effect on Saudi Arabia?

With the recent EU Referendum recently ending in a Leave result, we take a look at the potential Brexit effect on Saudi Arabia

Stocks

As the markets opened in the Middle East on Sunday for the first day of trading following Brexit, stock exchanges saw indices drop as a repercussion of the decision of the UK to leave the EU. The region’s largest index, the Saudi Tadawul, fell 1.35 percent. In the UAE, The Dubai Financial Market General Index closed at down 3.25 percent and Abu Dhabi’s Security Exchange finished at 1.85 percent down.

The Leave decision has disturbed markets all over the world as many expected a Remain outcome. The market volatility is forecast to continue across the globe as investors struggle with the possible implications and outcomes.

“While first day effects may be limited, we expect more volatility for the remainder of 2016 as post-Brexit pains combine with political uncertainty in Europe and the US,” said EFG Hermes in a research note. “MENA and global equity markets are likely to remain volatile for much of 2016, and risks to growth now appear to be tilted to the downside. Central banks may try to calm markets, but political uncertainty will limit how much effect they have.”

Banking

Saudi Arabia has already announced that their financial institutions had made precautionary changes to assets denominated in sterling and euros before the vote took place. Reuters reported.

The Kingdom had been monitoring the situation and made the changes as a precautionary stance, Saudi Arabian Monetary Authority governor Ahmed al-Kholifey was quoted as saying by the official Saudi Press Agency.

“For the banking sector, we expect that the impact will be limited, because it is less exposed to the two aforementioned currencies’ movements,” he said.

Saudi Arabia’s foreign assets are mainly denominated in US dollars, in the form of securities such as US Treasury bonds and deposits with banks abroad.

“It is too early to judge the lasting impact of the exit of the United Kingdom from the European Union, whether on the British economy or on the EU’s economy, and therefore on financial and investment markets,” Mr. Al-Khulaifi continued.

Mr. Al-Khulaifi said that SAMA expects the impact on the Saudi banking sector to be limited as it is less exposed to the pound and euro’s movements.

BBC brexit-process

Image – BBC

Oil

Saudi Arabia and most of its oil exporting neighbors in the GCC peg their currencies to the U.S. dollar, in which their biggest revenue earner, oil, is priced.

Saudi Arabia is the Middle East’s biggest economy, and has amassed hundreds of billions in foreign reserves over the past decade. The price of oil has seen a sharp decline since the middle of 2014 and although it has caused the Kingdom to use some of these foreign reserves, it still has assets worth around $581BN.

Most regional stock markets have seen a decline in the past year due to worries about how the drop in oil price will impact their economies that have been so dependant on the commodity. Saudi Arabia announced Vision 2030 earlier this year as their move away from a petro dollar dependant economy and that has seen an increase to investor sentiment. Crude oil has also seen a slow increase over the last few weeks as the markets steady.

However oil prices did see a drop on Friday following the Brexit announcement. The global benchmark, Brent saw a 4.9 percent drop, finishing at $48.41 a barrel on ICE Futures Europe, the biggest one day percentage decline since February.

“The safest bet oddly in these markets may be Middle Eastern markets, which have only marginally rallied with oil prices, have stable dollar pegs for the next year at least and are starting to head in the right direction in shifting their governance regimes,” Emad Mostaque, a strategist at London-based consultancy Ecstrat, said in a note to clients.

While the Brexit vote on Thursday may make oil prices more volatile in the short term, the UK’s decision is unlikely to drastically disrupt the oil market’s fundamental drivers, production and consumption, said Robert Johnston, CEO of Eurasia Group, a political risk research and consulting firm. “The market is mostly focused on what the Saudis are doing and what’s happening in the U.S. shale sector,” he said. “Brexit is less of a factor.”

Opinion

The Gulf economies are largely protected from global currency fluctuations due to their dollar pegs, whilst GCC stock markets are dominated by local institutions that usually help limit the impact from international market volatility.

With Saudi Arabia’s move away from oil in Vision 2030 and the steadying of the country’s economy through building it’s private sector and increasing outside investment, Brexit is unlikely to have the drastic effect on the country that it will have on other areas.

Sources; The National, The Wall Street Journal, International Business Times, Gulf Business, RT

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