Middle East stock markets could take hit from Brexit on Sunday

Middle East stock markets look set to fall sharply on Sunday in response to global market turmoil after Britain’s decision to leave the European Union, but Gulf foreign exchange forwards and credit default swap prices suggest a panic may be avoided.

The Dow Jones industrial average plunged 3.4 per cent and MSCI’s all-country world stock index fell 4.8 per cent on Friday; Middle East markets may drop by similar margins.

Beyond the global market unease, Brexit could hit Gulf economies and therefore markets in several ways. Slower growth in Europe may push down oil prices; Brent oil sank 4.9 per cent to $48.42 a barrel on Friday.

Monica Malik, chief economist at Abu Dhabi Commercial Bank, said that among the Gulf Cooperation Council economies, she expected the greatest impact of a weaker pound and euro to be felt in the United Arab Emirates, because of its large tourism and real estate sectors.

“We see a weaker private consumption and investment outlook in the UAE following Brexit,” she said in a report.

Also read: Brexit: How will it impact the GCC?

She also noted that while Brexit was likely to deter any U.S. interest rate hike for the time being, it would probably require GCC economies to tighten fiscal policy further to limit the widening of their deficits and protect market sentiment.

“Moreover, with the fall in oil prices and elevated global market uncertainties, foreign borrowing rates for GCC entities will likely increase. This will place more pressure on domestic borrowing and potentially push up interbank rates further.”

However, movements in Gulf forex forwards and sovereign debt insurance costs on Friday were minor, suggesting foreign investors were not for now using Brexit as a cue to speculate heavily against GCC assets.

One-year U.S. dollar/Saudi riyal forwards, used to hedge against the risk of future currency depreciation, barely moved on Friday and stayed well within the range of the past few weeks. High-grade Gulf bond prices moved very little.

Five-year Saudi credit default swaps rose 6 points to 182 points and stayed below highs hit earlier this month – a small move given the volatility in global markets.

The central banks of Saudi Arabia and the UAE issued statements saying they expected little impact on their financial sectors from Brexit because of limited exposure to Britain.

Also read: Saudi, UAE say Brexit to have little impact on their financial institutions