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Gulf and North African countries have significant investments in the British financial and real estate markets, making them particularly vulnerable to any disturbances that may occur in the British economy.
This article was translated from Arabic.
The British economy has been in a state of recession since mid-2022, and it currently seems to be headed for a more serious crisis in 2023. Arab investments in Britain and British investments in Arab nations will both be impacted by the economic decline, which is likely to have profound implications for the nations in question.
This will be particularly felt by Gulf countries, including Saudi Arabia, the United Arab Emirates, Kuwait and Qatar. Due to their extensive reliance on exporting products and services to the British market, nations like Egypt and Morocco will also be affected by the crisis.
Mounting factors that led to the British crisis
The British economy was under pressure from a number of financial and monetary factors between 2020 and 2023, which led to a major escalation of the economic crisis at the turn of the year.
The COVID-19 pandemic in 2020 forced extensive closures that had a bearing on all sectors of the British economy. The largest decline in GDP in three centuries, of about 9.9%, caused a spike in unemployment rates and had a major effect on local productivity.
Trade restrictions ceased on December 31, 2020, and Britain formally left the EU on January 31. Within a year and a half of Britain’s exit, exports to the EU dropped by 68%, and the loss was assessed to be $38 billion, or 5.2% of the British economy.
As the pandemic receded, Britain reopened its economic sectors, raising demand and consumption to record levels and causing significant inflationary pressure. The inflation rate surpassed 11 per cent in the last quarter of 2022, the highest in over 41 years. Brexit and tariffs on European products also contributed to inflationary pressures.
To combat and control inflation, the Bank of England (the central bank) implemented a series of interest rate hikes by late 2022, resulting in the highest rates seen in 33 years. While essential to address rising prices, this rapid and systematic approach to raising interest rates had the unintended effect of driving the British economy toward contraction. Rapid interest rate increases are known to curb investment borrowing and reduce liquidity, directing funds towards the financial system rather than new projects.
In 2022, an energy crisis hit Europe following the outbreak of the Ukrainian war, resulting in a significant increase in oil and gas prices. Britain’s main challenge is that it is no longer part of the European Union, which excludes it from the Union’s plans to ensure collective energy security for European countries. Consequently, the crisis incurred higher costs for Britain to avoid disruptions in energy supplies, ultimately affecting the productivity and competitiveness of the British economy.
In the final quarter of 2022, a crisis stemming from the Liz Terrace government plan emerged, compounding the economic difficulties and causing sizable losses in the financial markets. Terrace left her position just 44 days after being appointed, but the repercussions the plan caused remain in place today.
The first two months of 2023 have revealed the state of the British economy, as several indicators that recently came to light demonstrate the consequences of the past few years. According to the latest reports by the International Monetary Fund, the British economy is projected to contract by 0.6 per cent in 2023, a revision from their previous estimates, which predicted a 0.9 percentage point. This puts Britain as the only industrialized country within the G7 group expected to experience a contraction this year, rather than growth. Additionally, the British economy did not experience significant growth in the last quarter of 2022, and actually contracted by 0.3 per cent in the third quarter.
Beginning in 2023, Britain saw the biggest drop in its citizens’ purchasing power since the global oil crisis in the mid-1970s. This decline in consumer ability pushed the country into stagflation, where inflation rates rise simultaneously with a sharp economic recession. The Bank of England consequently warned that the country is facing its longest economic recession in over a century.
While Western economies have recently experienced economic pressure, the British economy is presently going through an especially severe crisis. And the crisis is expected to worsen, and interest rates are likely to rise considerably in the near future, according to the majority of economic analyses. It is anticipated that this will lead to more labor strikes and social unrest.
The repercussions of the crisis on Arab investments in the UK
Gulf countries have significant investments in the British financial and real estate markets, making them particularly vulnerable to any disturbances that may occur in the British market. Gulf investments in Britain are distributed as follows:
– Qatari investments in the British markets amount to over $43 billion, with a particular focus on the real estate sector.
– Emirati investments in Britain are valued at around $14.9 billion, and have been expanding due to recent investment agreements with British companies and UAE sovereign investment funds.
– Saudi investments in Britain are relatively limited, with a total value of only $1.2 billion, possibly due to a preference for investing in the American financial and real estate markets.
– Kuwaiti investments in Britain exceed 17 billion pounds, including holdings in major companies such as British Petroleum, Vodafone, and HSBC.
If the current economic crisis in Britain leads to a rapid decline in real estate, stock, and debt security prices, Arab countries with significant investments in the British financial and real estate markets could face losses, as was the case during the global financial crisis in 2008. A sizable percentage of these investments are bound by lengthy contracts and agreements, which may make it difficult for investors or Arab governments to exit these investments at present.
British investments in the Arab region
With a focus on the financial, energy, and industrial sectors, British investments total more than $9 billion in the UAE market and $6.7 billion in Saudi Arabia. More than 150 British businesses working across a range of industries call Kuwait home, including significant global players in the shipping, energy, and retail sectors.
Several British companies are currently active in Bahrain, operating in various sectors such as defense, transport, construction, infrastructure, and railways. According to statistics, there are over 150 Bahraini companies with British partners, and the British community in Bahrain has surpassed 10,000 individuals. In Oman, British companies, Shell and BP, have been engaged in oil and gas production for more than 30 years, under long-term contracts.
British businesses are expected to reduce their investments in Arab nations if financial instability continues. This has been observed during the previous global financial crisis, resulting in a decline in foreign investments in the Gulf region and setbacks in the Gulf’s financial and real estate markets.
Arab exports to Britain
The crisis will undoubtedly impact Arab countries, particularly through their exports to the British market, which are expected to shrink due to reduced demand and consumption in Britain. Egypt is especially vulnerable, given that its annual exports to the British market exceed $1 billion.
Meanwhile, Morocco relies heavily on the British market to sell its agricultural products, such as vegetables and fruits. Since Britain’s exit from the European Union and the signing of trade facilitation agreements between the two countries, the volume of these exports has nearly doubled.
It is essential that these nations carefully monitor the economic situation in Britain and brace for impact. Governments must develop plans to anticipate any losses that may arise from their investments or their citizens’ investments in the British market, as well as the consequences of a possible decrease in exports to Britain. Additionally, it is recommended that these nations diversify their exports and assets to lower the risks brought on by such external crises.