Impact of Brexit on Kuwaiti firms and individuals

Regardless of the massive political divisions among the public and MPs in the United Kingdom and the European Union (EU) toward Brexit, the harmful implications of post-Brexit is becoming more significant day by day, in particular, the future negative impacts on UK’s economy.

The global economy is interconnected, and with the UK ranked as the fifth largest economy in the world, the economic impact of Brexit are likely to be felt worldwide. Kuwait, with its historical ties to the UK that span centuries, has commercial and financial interests on the government, private firms and individual levels, which could be impacted by Brexit.

Here we attempt to figure out the various effects of Brexit on Kuwaiti firms and individuals. Kuwait is one of the top-50 trade partners for the UK and the total Kuwaiti governmental and private investments in the UK is reported to be in excess of $65 billion.

Also, many Kuwaiti firms and investors such as Kuwait Investment Authority (KIA), which has more than 16 percent of its assets in Britain, consider United Kingdom the gateway to Europe. Moreover, tens of thousands of Kuwaiti individuals have invested their funds in British properties and find the UK to be a desirable destination in terms of tourism, education and medical service purposes.

Since the Brexit referendum, there have been a large number of analytic studies on the implications from a post-Brexit era, and each of these have come up with different outcomes. In November 2018, following extensive economic analyses, including stress tests to approach the accurate consequences of both, a disruptive ‘deal’ and a disorderly ‘no deal’ scenarios, the Bank of England released a weighty report. The Bank found that the economy in the UK will be hit towards the mid of 2019 by a negative shock that could cause a recession that would extend to 2023, before any economic correction.

Briefly, the bank’s report points out that Britain leaving the EU single market and customs union could result in British trade gradually shrinking by 15 percent till 2023, which means implementing tariffs on products and enforcing restrictions between UK and EU borders. As a result of this shrink in commercial exchange, economic growth is going to decline to minus 6.5 percent on average. Also in the same context, sterling pound’s exchange rate is predicted to decrease between 15 to 25 percent from its current value, and that will lead the interest rate to rise by 5.5 percent, and for the inflation rate to increase to 4.25 percent, in the best case scenario.

Furthermore, the report points out that due to the emergence of unusual restrictions on the trade and movement between the UK and Europe, trade openness and foreign investors attractiveness will be reduced by 20 percent and that property prices will slump around 30 percent. Broadly it seems clear that Brexit has considerable implications on vast aspects within the UK and might create turning point of the general situation and stability there, which causes direct and indirect consequences for firms and individuals in  Kuwait because of their strong commercial correlations with the UK.

The exchange rate of pound sterling has fallen more than 12 percent against Kuwaiti Dinar since the Brexit referendum in 2016 and according to the Bank of England’s findings, the pound is going to have double depreciation and real estate sector will face crash in prices. This, in turn, will threaten the values and returns of KIA assets and consequently its contribution into the general revenues of the state budget. The fall in value of pound sterling will also impact Kuwaiti investors and business, in particular, those engaged in the UK property market.

However, the weakness of pound sterling to the Kuwaiti dinar will benefit Kuwaiti residents and visitors to the UK, as it will raise their purchasing power and increase their spending in British markets. This could also encourage Kuwaiti investors to push their funds into lower priced properties market for either leisure or long term investment purposes.

Although most of the indicators showed that leaving EU and imposing tariffs and restrictions on goods would damage the trade and economy of the UK, many Brexiters consider that there is a  possibility to fill “trade gap” after Brexit and protect the global position of British trade through arranging free trade deals with many countries such as; US, GCC, Japan, and other Asian states. To cover losses from European trade, the UK government has been entering into trade deals with many governments, including with the six-nation Gulf-Cooperation Council (GCC).

Kuwait is at the top of the list for UK government because of the historic and strong relations between the two countries in all aspects and due to the democratic atmosphere and the progress in human rights field in Kuwait. No doubt that signing trade agreement between the two countries would be a benefit for both and take their mutual economic and strategic interests to higher levels. Any trade pact between UK and Kuwait is going to benefit wholesalers and retailers through getting rid of tariffs and related costs for goods imported from Britain. The trade deal will also grant opportunities for Kuwaiti businesses to enter into British markets.

Moreover, the expansion in commercial ties will assist Kuwait government in achieving general economic aims, while the trade pact will create a large number of jobs and, more significantly, the deal will enable the flow of British capital to Kuwait market. This inflow of investments will in particular support Kuwait’s ‘2035 vision’ of becoming a commercial and financial hub in the region.

To safeguard Kuwaiti investments and assets in the UK following Brexit,  Kuwaiti officials and investors need to consider various Brexit scenarios and take into account its potential threats and opportunities and find the best possible methods to boost cooperation between the Kuwaiti and British economies.

 

 

 

 

 

 

By Salman Al-Naqi
Special to The Times Kuwait