According to Standard Chartered’s recent report ‘Brexit – Global Implications’, the financial markets underestimated what a leave vote could mean for the UK and other countries. The bank highlights that this could lead to an implosion and an unravelling of the European Union, despite the UK always being seen as “the awkward partner of the EU, rather than a core European country.”
The sharp 11% decline of the pound was shocking and brutal for investors. The Wall Street Journal described this as “an epic move for a developed-market currency,” and Damian Handzy, Global Head of Risk, StatPro, wrote for bobsguide and explored how this seismic decision has already made and will make an impact on trade.
Handzy’s predictions were correct: “Today’s markets are signalling that a vote to stay would give an immediate pop to the GBP of around 3%, while vote for a Brexit would give an immediate plunge of 11%.” He continued to suggest that over the subsequent four months, the pound would either gain 4% or drop a further 3% to total a loss of 14% against the dollar. Handzy concluded by saying that a leave and remain vote would have both had some effect on the global markets.
Standard Chartered also mentioned how the euro has been suffering recently and has been viewed as dysfunctional. “Europe and especially the euro area are suffering from a dysfunctional common currency, and a disastrous austerity policy that has driven millions to unemployment. These problems would have kept social pressures high, with or without Brexit. We expect downside risks on the euro (EUR) to prevail and we lower our GDP forecasts for the euro area to 1.2% from 1.4% for 2016 and to 1.2% from 1.5% for 2017,” the report read.
With a couple weeks of risk aversion at a high, the USD will continue to be supported, but as the report states, the market expectations readjustment of Fed hikes should take away from the USD’s momentum. Alongside this, Asian local currency (LCY) assets will be under pressure but only for a short period as the bank predicts that China will grow by 6.8% this year and if there is a yuan depreciation, Standard Chartered believe that it will be “managed and gradual”. “These factors should help stabilise sentiment. We see Asian credit markets as a relative safe haven among emerging markets.”
Africa will experience increased vulnerability, especially those countries that are in need of imminent refinancing for repayment of external debt and sizeable borrowing to support counter-cyclical infrastructure spending, like Ghana and Nigeria. “If plans for increased Sub-Saharan Africa (SSA) issuance are scaled back, forcing a more rapid primary fiscal adjustment with cuts to capital expenditure, the negative growth implications of Brexit on SSA markets are likely to be seen upfront.”
Here is a breakdown of Standard Chartered’s predictions for the post-Brexit world:
- A negative economic impact with forecasts ranging from -3ppt to -6ppt off of the baseline GDP.
- H2-2016 GDP growth could fall and turn negative.
- Reduction in 2017 growth will be seen, dropping from 1ppt to 0.5%.
- Further easing from the European Central Bank (ECB) could happen later this year.
- London could take the position of key price-setting market in Europe, but the city’s status is insecure.
- Immigration referendum to be held in Hungary and other countries may follow.
- While net recipients of EU funds are not likely to make big changes, some states may be encouraged to see the UK as an example of the “new model of a relationship with the EU.”
- The market’s greatest worry is that countries may become more eurosceptic and threaten to leave the Euro.
- Imported financial conditions would tighten which would result in US exports and income from FDI being impacted.
- The Federal Reserve is anxious about the increased risk that the Brexit could bring and this apprehension is expected to continue until some concrete decisions are made in the UK.
- The interest rate hike planned for the 27th of July is becoming increasingly unlikely.
- As markets assess vulnerability of EM markets to investor risk aversion and capital flight, the USD should make gains against a number of EM currencies.
- The direct growth impact on Asia will be significant as trade with the euro area ranges from 10%-15% of total trade for each economy.
- However, Asia is better placed than most in this current environment as it benefits from higher growth potential and will continue to be attractive.
- Brexit will encourage central banks to maintain accommodative policies and more easing is expected from China, Korea, Japan, Australian and New Zealand.
- Indonesia may be hampered by the risk-aversion environment and will have to use monetary policy support.
- The EU accounted for 16% of China’s total exports last year and the Brexit will have an effect on external demand, as well as market volatility having an impact on investment, reducing FDI inflows from Europe and fuelling capital outflows.
- If the repercussions are contained within the UK, the India will not experience any significant economic damage and some experts believe that the subcontinent could benefit from the vote to leave.
- Although Kenya has already expressed concern about renegotiating trade agreements and new deals may need to be made specifically with the UK, there is no immediate risk.
- The most liquid SSA currency, the South African rand has shown the most vulnerability to Brexit as it weakened by 8% against the USD following the early announcements of the leave vote.
- The market for new debt issuance could remain closed for longer in the Post-Brexit Africa.