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Brexit and the MENA Region

04, Aug. 2016 News

The outcome from the recent British referendum on EU membership took markets by surprise. Going into the vote, markets were pricing in a low probability of a ‘Brexit’, and the British pound and global risky assets were trading higher days leading into the vote, responding positively albeit nervously to the latest polls which favoured the remain camp, albeit by a small margin.

Understandably this shock outcome coupled with unfavourable investor positioning and ensuing uncertainty did not play well on investor risk appetite, and risky assets were sold heavily in favour for safe-haven ones. While this outcome will certainly have an effect on an already fragile global economy, markets have come to understand that this will likely be a drawn-out process that will have greater political and economic ramifications predominately for the UK and the EU. Fears of global recession and financial contagion were possibly overblown, while global central banks particularly the Bank of England took the courageous and immediate step to watch developments closely and provide support as needed helping to shore confidence.

For the Mena region, we would expect to see the effects from Brexit to be largely limited to indirect transmission channels, largely from price developments in oil and the US dollar on account of investor sentiment, particularly for oil-exporting GCC nations. While we have seen the undesirable effects the stronger USD has had on the commodity complex over the past years, the oil market is now on a better footing with improved demand/supply balance recently in contrast to prior supply excesses, which should help support prices. I would expect the stronger USD to have impacted non-oil trade balances for USD-pegged Mena nations and placed pressure on those with floating rate regimes and heavy USD-denominated external debt. Having said that, the US Federal Reserve will likely err on the side of caution before raising rates, which should help calm USD strength fears, as markets are pricing in a move closer to 2018. This could help regional banks that have seen tighter liquidity but hurt profitability in those with excesses held at near-zero rates.

 

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