The referendum on British membership of the EU has ended in an unexpected victory for the ‘Leave’ camp1. This has prompted Prime Minister David Cameron to resign, the pound to fall to its lowest level against the US dollar in 30 years, and stock markets around the globe to crash. Although it is too early to assess the full impact of the decision, companies doing business with the UK should brace themselves for an open-ended period of uncertainty. While we expect that stock markets and the pound will recover some of their immediate losses in the coming weeks and months, the uncertainty surrounding the UK’s future relations with the EU (its most important trading partner) has led Dun & Bradstreet to downgrade the UK’s country risk rating from DB2a previously (on a par with the US) to DB2c, with a ‘deteriorating’ outlook.
Although polls showed a close race, and book-makers predicted a clear victory for the ‘Remain’ camp, the Leave campaign won the referendum by a comfortable margin (51.9% to 48.1%). A regional analysis shows that the London area, Northern Ireland and especially Scotland2 were strongholds for the Remain campaign, while support for leaving the EU was particularly strong in the Midlands and the English North East.
Stock markets had rallied in the days before the referendum (when the Leave camp lost its lead in the polls) and the pound had appreciated against the US dollar for similar reasons. However, the FTSE 100 lost 7.4% immediately after the referendum result emerged (the FTSE 250 dropped by 11.7%), while the pound fell to its lowest value against the dollar in more than 30 years 3.
On the political front, several questions are still to be answered. Prime Minister David Cameron announced his resignation immediately after the referendum, but will stay in office until October to give his ruling Conservative Party a chance to select a successor: Brexit-campaigner Boris Johnson is the frontrunner4 . It remains to be seen whether early elections will then be called or if Cameron’s successor will continue to govern until the scheduled end of the parliamentary term in 2020. The biggest question mark at the moment is over when the British government invokes Article 50 of the EU Treaty and starts the countdown for leaving the EU5 . Once activated, Article 50 is a one-way street towards exit: exactly two years after its invocation, EU law would cease to apply in the UK – unless all 28 member states agreed to extend the deadline. Alongside the search for a new PM (and almost certainly a new Finance Minister, as the current one was a vocal opponent of Brexit), the election result in Scotland creates concerns regarding a renewed push for Scottish independence. Given the caveats (such as the requirement to adopt the euro if ever admitted to the EU as an independent state, and the current low oil price), the road to Scottish independence would not be an easy one, despite indications from Scotland’s devolved government that it will look into this option again6. In Northern Ireland, Brexit could have far-reaching consequences on the peace agreement between loyalist (pro-British) Protestants and separatist Catholics, as well as on the economy (which is heavily linked to that of the neighbouring Republic of Ireland – an EU member). The peace agreement signed by the two groups in the late 1990s is based on EU law, and any attempt to renegotiate the status quo would prompt fierce opposition from the Catholic side.
Impact on companies
Although media headlines might suggest otherwise, the referendum has not yet changed the legal framework for exporters and importers: the UK will remain a member of the EU for at least two years after Article 50 is invoked, meaning that companies exporting to and importing from the UK can count on there being no changes to the legal framework in this period. However, the medium- to long-term future is much more uncertain – hence our risk rating downgrade. It is currently completely unclear what a new trade deal between the UK and the EU (as well as the rest of the world) would look like. Every option mentioned by Brexit campaigners has its flaws7 and, in a worst case scenario, the UK will give up access to the EU market in order to maintain control over its immigration policy. In any case, it seems unrealistic to expect that a new deal could be struck within the (very tight) two-year deadline laid out in Article 50; this raises immense concerns regarding market access after 2018. Worryingly, the referendum outcome will also inevitably cause short-term problems for the British economy, limiting opportunities for doing business in the country. Markets have overreacted in the immediate aftermath of the referendum result, and although a normalisation process will start in the coming days a recession in H2 2016 is a realistic scenario. The financial sector will be particularly badly affected, but we expect the Bank of England to launch a series of support measures in order to maintain stability in the sector8. Furthermore, industries that either rely on foreign labour (services, hospitality, and agriculture) or which are heavily integrated into EU supply chains (automotive and other manufacturing) will also face tougher operating conditions. While British exporters will benefit from increased price competitiveness on global markets thanks to the depreciation of the pound, exporters to the UK will face lower demand. As the situation is evolving rapidly, we recommend monitoring developments closely and frequently in the coming days and weeks.
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