Brexit it is then.

Please note that the contents of this post are my personal observations and not to be published and attributed to the Ceylon Chamber of Commerce (CCC). The CCC will be releasing a statement within the course of the day, in response to numerous requests from the media.
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Here are some of the early impacts in global markets:
  • The GBP has fallen by sharply, not seen since the financial crash of 2008/9. The GBP is at levels not seen since 1985. Currency markets are seeing sharp volatility. Global risk sentiment will be substantially negatively affected.
  • At the time of writing, GBP to USD is down a sharp 10.5%; GBP to EURO is down a sharp 6.8%; and EURO to USD is down over 4%. 
  • Update: FTSE opened 7% down; bank stocks have taken a sharp beating (around 30%); investors are flocking to ‘safe haven’ assets like gold, US treasuries, and USD
We are likely to see substantial market volatility in the coming days as the shock effect of the results pan out and markets take into account the impacts, with substantial dampeners on international currency and capital markets. Of course, with it bottoming out and stabilising over time as markets begin to price in the results.
Some likely  impacts for Sri Lanka are from the following channels:
  • The impact on international capital markets as volatility affects borrowing costs for countries like Sri Lanka. This is a spanner in the already edgy financial markets. Generally, in times of volatility, investors tend to stay out of frontier and emerging markets like Sri Lanka and go to safer assets like Dollar and Gold.
  • The impact on economic activity and dynamism in Europe and the impact on the markets for our exports there. Britain being in the EU helps the EU economy as a whole. Britain buys a lot from the Rest of Europe (ROE), encouraged by the free trade area and customs union. So the ROE’s exports will no doubt be impact.
  • SL having to do possibly do a bilateral deal with Britain, as regaining GSP plus won’t help in our market access to Britain. We will certainly not be the first in line for the bilatarels – estimates suggest Britain will have to do over 100 bilateral trade deals, which would take years
  • In the longer-term, if Brexit triggers other exits by other member countries (and there is no reason to believe this is immediately likely), this will affect the Euro and increase trade costs in Europe, which of course affects market access and competitiveness of Sri Lankan exports to Europe
  • Sri Lanka could also be impacted by a wider slowdown in the global economy – economists have estimated that Brexit could cause global growth to dip below 3% which is tricky territory.
  • Protracted political gridlock in the EU as a result of Brexit and the resultant negotiations for a post-Brexit deal can hurt policy coordination on economic issues, impacting business, trade and finance.
Now the severity of each of these impact channels on Sri Lanka won’t be known for sometime and we are not able to quantify the impact at this stage. These are the indicative channels of impact we should continue to look at.
As background information, 10% of Sri Lanka’s exports go to the UK (USD 1 billion; approx. LKR 139 billion) and 28.8% of exports go to the EU as a whole (USD 3 billion; approx. LKR 411 billion). Close to 56% exports go to the USA and EU together.
On the global implications, Standard Chartered Bank set out these in a Research Note circulated today, after the final results were announced:

 

The vote has hit global risk sentiment, with the USD and JPY rallying and Asia- Pacific equity markets selling off sharply. We expect more pronounced risk aversion in the coming days, with GBP assets at the heart of this negative dynamic. The euro area is also at the forefront, with bank equities likely to come under pressure and peripheral sovereign yields likely widening versus Germany. We expect GBP-USD to echo the c.15% fall following ‘Black Wednesday’; GBP-USD could fall to around 1.20- 1.25. We expect safe-haven flows into USD and JPY assets, with EUR-USD at 1.03, AUD-USD at 0.65, NZD-USD at 0.63, USD-CAD at 1.40 and USD-JPY at 95. The coming days will test central banks’ ability to support market sentiment, as well as the Bank of Japan’s willingness to allow broad-based JPY strength.

 

In an earlier post this week, I recapped what experts are indicating as the possible impacts of a Brexit on the Brtish economy, including the loss of GDP, impact on trade, and impact on jobs. This side by side comparison by the FT nicely shows how the EU membership has helped the British economy. While it isn’t certainly the only factor, it has contributed.
Screen Shot 2016-06-24 at 10.18.15 AM.png
The article by FT also summarises the forecasts by a bunch of economists and think tanks on the likely sustained growth impacts of Brexit.
Screen Shot 2016-06-24 at 10.20.18 AM
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GBP v USD at 9.30am LK time
Screen Shot 2016-06-24 at 9.24.11 AM
GBP v EUR at 9.30am LK time
Screen Shot 2016-06-24 at 9.25.02 AM
Updated: 6.55pm LK time.
Cover image from BBC News
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One thought on “Brexit it is then.

  1. The UK might expedite the bilateral trade deals with countries. Granted other countries have much more economic clout than Sri Lanka. After the withdrawal symptoms and triggering Article 50, they will need to get back to business as usual. Economic Diplomacy will be required to be first in line to get this going, especially for the garment industry. Note that Sri Lankans working in UK are not affected at all by this, and it should become easier to non-EU members to get a job as the EU citizens (who were paid more anyway) go home eventually.

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