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Moody's Investors Service says that the United Kingdom's (UK, Aa1 negative) vote to leave the European Union (EU, Aaa stable) will not have a significant credit impact on GCC sovereigns because their 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.
Moody's report, entitled "Sovereigns -- Brexit and the Gulf Cooperation Council: Negligible credit impact given large investment buffers and limited trade," is available on www.moodys.com. Moody's subscribers can access this report via the link provided at the end of this press release. The rating agency's report is an update to the markets and does not constitute a rating action.
It is unlikely that a loss in value of some existing GCC investment in the UK will materially weaken GCC governments' net asset position, according to Moody's. 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 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.
UK investment in the GCC is unlikely to slow. Most of the UK's FDI in the GCC is in the hydrocarbon sector, which is unlikely to be materially affected by Brexit.
Banking sector retrenchment presents moderate risks, with the UAE (Aa2 negative) and Qatar (Aa2 negative) vulnerable in the event of a retrenchment of UK banks from the region. Nonetheless, the risk of a sudden scale-back in operations is limited and stocks have proved relatively stable through past shocks.
Finally, Moody's notes that trade between the GCC and the UK is modest. GCC export shares to both the UK and EU have declined over time, as energy demand from Asia has increased. In 2015, GCC trade with the UK accounted for 2.7% of the region's global trade.