2016: A YEAR OF DISRUPTION

Rising risks to Asean from messy Brexit talks

The shock Brexit vote on June 23 has so far generated more uncertainty than actual disruption to the global economic and political environment.

The initial economic shock from the vote globally and for Singapore has been less than feared, but it is still seen as an "unnecessary obstacle" to trade and business should divorce proceedings become messy.

"Brexit is the endgame we haven't seen triggered yet," CIMB economist Song Seng Wun said. "The best-case scenario is a smooth, orderly exit, but there are concerns the EU may try to make it as difficult as possible for the UK because they don't want this to be a precedent for others to exit the EU."

Still, many economists believe Singapore and the rest of Asean will likely remain somewhat insulated from the effects of Brexit, as trade exposure to Britain is minimal for most Asian economies. Singapore's exports to Britain accounted for 1.1 per cent of its gross domestic product (GDP) last year.

But there could be potential negative secondary effects for Singapore firms in Britain that use the "passporting" of goods and services to sell to the EU. "They may have to reconsider their business model when it comes to selling into Europe," said Mr Manu George, senior investment director of Schroders Asian Fixed Income.

 

Of bigger concern is whether more European countries will follow Britain and leave the EU, Singapore's No. 2 trading partner after China. Singapore's exports to the EU accounted for 9.6 per cent of its GDP last year.

Any spillover into the EU, the third-largest trading partner for Asean after China and Japan, would have a bigger impact for Asean.

Still, there is a silver lining. Britain might be prompted to beef up ties with traditional trading partners, which would augur well for Singapore, Mr Mark Billington, regional director of ICAEW South-east Asia, said.

The expected triggering of Article 50 by the end of March will kick-start a two-year negotiation for Britain to leave the EU.

"Talks will not be smooth, and, starting in a year of many key European elections, the EU is most likely to use the occasion to solidify the integrity of the union and also to accord the UK a hefty price for abandoning the union," UOB Global Economics said.

Some economists believe Britain seems to be headed for a "hard" Brexit as Prime Minister Theresa May has put an emphasis on controlling immigration, and not being subservient to EU regulations.

But Britain will not be allowed to choose which of the "four freedoms" (movement of labour, capital, goods and services) it adopts. As with the rest of the EU, it is an all-or-nothing deal.

"Controlling the movement of labour implies a 'hard Brexit' where the UK loses easy access to the EU single market. This is a particular risk for the financial services sector, while weaker growth is expected due to damage to trade, investment and immigration," Bank of Singapore chief economist Richard Jerram said. He warned that the next 12 months are likely to be "very tough" for Britain.

But the pound's sharp drop might offset the damage, he said. Already, the sterling has dived nearly 16 per cent against the greenback since the Brexit vote, and helped improve the competitiveness of Britain's economy, mostly in manufacturing. Against the Singdollar, the pound has fallen 9.5 per cent in recent months.

While this means Britain remains an attractive place for Singaporeans to buy property, local companies such as City Developments and ComfortDelGro, which have operations there, will likely face currency volatility - a weaker pound translates into lower British-derived earnings in Singapore-dollar terms.

A version of this article appeared in the print edition of The Straits Times on December 20, 2016, with the headline 'Rising risks to Asean from messy Brexit talks'. Print Edition | Subscribe