Brexit’s Early Slammed Door Drift
The UK vote to leave the EU was an immediate surprise for global financial markets with large selloffs, as neighboring emerging economies in particular with close commercial and credit links tried to assess lasting effects pending treaty renegotiation. Although sell-side analysts were wrong on the outcome, they have not swung to doomsday scenarios predicting EU economic and political collapse but caution about a likely rocky medium-term path. British and European GDP growth forecasts have been shaved around 0.5 percent through next year, but the decision could further slow world trade stagnating since 2010 and cross-border capital flows that have also reversed from recent historic trends. Another risk is anti-EU backlash spreading among new Central Europe members, but the latest poll shows negative majority sentiment only in the Czech Republic. UK export and banking ties are modest in comparison to the loss of structural funds that my accompany withdrawal, with Hungary and Poland large recipients, and the two could likewise experience British tourist decline. They can ease fiscal and monetary policy to offset the shock, and most East European FDI comes from the continent rather than across the English Channel. In the broader EMEA bloc half of South Africa’s direct investment is UK-based, but through financial services and mining holding companies with a global footprint. Worker remittances are another channel and account for 0.3 percent of GDP for Croatia but Nigeria and other developing countries outside Europe would be far more vulnerable at 15 percent. In bank lending British groups are involved most heavily in Sub-Sahara Africa and in Zambia, Ghana and Kenya in particular. GCC relationships are also prominent for petrodollar recycling, while in Europe claims on Turkey lead at 2.5 percent of GDP. Asia has been removed from direct Brexit consequences, but China may shift near-term currency and capital account regimes toward incremental, neutral stances as it tries to avoid a repeat of last summer’s upsets. In Latin America Spanish bank presence could come under additional pressure after an indecisive election re-rerun, and commodity recovery could be sidetracked by the stronger safe haven dollar. However US Federal Reserve tightening may be shelved indefinitely, but Venezuela meltdown cannot be ruled out either to test the hemisphere’s crisis management.
External corporate debt issuance was suspended with the 52-48 departure nod as the annual total could struggle to reach $200 billion, on the low end of projections. JP Morgan calculates Europe revenue for its hundreds of index components at just 5 percent, with paper producers having the top exposure at almost 30 percent. It argues that currencies, with 2-4 percent emerging Europe falls in the immediate aftermath, and commodities could further roil the asset class after the dust settles with gold and silver in the latter category among the few gainers as precious metal refuges. European banks could be a distinct weak spot with lower valuations and emerging economy lines, but borrower demand has also lagged with deleveraging. Many Asian names without hedged pound positions could feel temporary bottom line damage and Chinese banks with a major UK presence could find progress blocked despite new Yuan clearing arrangements.
