The worries for investors over Brexit

Economists talk about the impact of a Brexit on the global economy.
City workers walk past the Bank of England in the City of London, Britain, March 29.
City workers walk past the Bank of England in the City of London, Britain, March 29. PHOTO: REUTERS

SINGAPORE - There is a strong likelihood that British voters will opt to leave the European Union in the referendum called on June 23.

So far, the debate has focused on how a vote to leave will pan out for Britain, with well-respected financial institutions such as the Bank of England and the International Monetary Fund warning that it could cause the country's economy to shrink and undermine London's position as an international financial centre.

But there is scarcely any debate on the Brexit issue in this part of the world, absorbed as we are with our own problems of sluggish growth prospects, recurrent concerns of a hard-landing in the Chinese economy and how another interest rate hike in the United States will affect our already tepid economy.

As such, I grasped the opportunity to examine the Brexit issue in a recent discussion with CIMB economist Song Seng Wun hosted by ST TV.

Mr Song is unabashedly in the "Remain" camp, marshalling powerful arguments as why Britain should choose to stay in the EU.

From a foreigner's standpoint, he noted that it is better for Britain to stay because the period following the departure, whether it turns out to be a friendly or messy divorce, would have an impact on investment decisions.

He said: "Business hate uncertainty which is why when you ask any business, they just prefer that the EU stays as it is with Britain inside the union itself."

But I am more ambivalent about British voters wanting to stay within the EU.

The way I look at it, the people who want to leave have waged a more passionate campaign, as they stir up xenophobic fears of foreigners flooding into Britain, snatching their jobs, their children's places in schools and beds in hospitals.

Arguments put forward by the Remain camp about how the departure would mean Britain imperilling its security and losing its clout internationally by giving up membership in a powerful club, are simply too high-browed to be grasped by ordinary British voters.

Hence, as the deadline to the referendum approaches, it would appear that like me, some investors are fearing the worst too, as they took 65 billion pounds out of Britain in the two months to April, according to Bank of England figures.

Mr Song believes a Brexit would lead to a recession in Britain.

"How deep it is really would depend on the terms of the exit and conditions. We could see a credit rating downgrade (for Britain) because of pressure coming from capital outflow from the UK, the pressure on the capital account and the current account." he said.

To me, however, the more immediate fallout will be on the financial markets and that is where Asia will feel the heat initially.

While concerns have been raised over Britain's economic future if it parts way with Europe, the possibility of a further splintering of the EU as a result of Brexit merits more attention.

Given the travails faced by the Eurozone over the debt worries encountered by member countries such as Greece, Italy, Spain and Portugal, support for European integration appears to be waning, with a recent opinion poll showing that just over half of its respondents across 10 EU countries still favour the EU.

In this respect, it is worthwhile revisiting the previous Eurozone crises that erupted in recent years.

One of the most serious occurred in June 2012 when Greece plunged the world's financial markets into chaos as its voters debated whether to leave the Eurozone, rather than to accept the austerity measures imposed on the country to try to get it to balance its books.

Greece may only be a small country, but the prospect of it tearing the euro apart was sufficient to send a collective shiver across Asia as well.

This was because even though Asia was far from the epicentre of the crisis, it was also tainted with contagion fears because of the extensive businesses operated by European banks across the region.

Of course, a divorce between Britain and the European Union would not take place immediately even if British voters vote for Brexit since time is needed to work out the details of the separation.

But there is still the prospect of a knee-jerk sell-off in the world's stock markets, putting pressure on the sterling and the euro if Britain presses ahead with separation.

Here, the lessons of recent history on how to contain the contagion may turn out to be useful as well.

Around this time four years ago, financial markets were also beset with turmoil over the Eurozone debt crisis and worries over the future of the euro.

But at that time, just hours before London burst into celebrations with the opening of the Olympic Games, European Central Bank chief Mario Draghi soothed the concerns by saying that "the ECB is ready to do whatever it takes to preserve the euro".

This time as another Olympic games gets underway in faraway Brazil, the investment world's eyes will be cast once again on London as it grapples with its European identity crisis.

Both the ECB and the Bank of England will have their work cut out for them in preserving investors' confidence if Brexit becomes reality.

* Goh Eng Yeow will be hosting DBS chief executive Piyush Gupta to a chat on investments at the Singapore Coffee Festival on Saturday at 4pm. Venue: F1 Pit Building.

Get more details and tickets at http://sgcoffeefestival.com.sg