By Timothy Chong | UNI.CORN, Team 4

Brexit wins. Now what for the world and Singapore?

June 30, 2016

*The views expressed here are solely those of the author in his private capacity and do not in any way represent the views of DBS.

 

A. Impact on the world’s economies

 

Paralytic fear in markets

 

Brexit has sparked turmoil and uncertainty in the world’s economies now that Britain has voted out of the EU. The UK is expected to lose favourable trade agreements the EU bestows once this becomes formalised. Therefore, there may be disruptions in trade, while new agreements are drawn up and carefully crafted. With details not yet affirmed, this will surely lead to uncertainty and confusion around the trade terms, impacting growth unfavourably. We will get this ‘rabbit-in-the-headlight’ effect where investors and business are too afraid to make any new decisions, or investment, as they are unclear about the future. The immediate effect will be the decrease in trade or investment activities, hammering growth.

 

Flight to safety

 

Developing countries which are resource-rich exporters like Malaysia and Indonesia may see their currencies depreciate as oil and gas exports become cheaper to cope with the decreased demand from the UK. Emerging-market currencies such as the Malaysian ringgit, Indonesian rupiah and South Korean won will likely bear the brunt of selling in midst of potential monetary change. Investors would see currency from developing countries with heavy exports to Britain as risky assets and would flee to other safe-haven assets such as gold and the Japanese yen.

 

B. Impact on the world’s economies

 

MAS was quick to reassure investors and stakeholders that the Singapore’s economic landscape and currency is under control. The Monetary Authority of Singapore (MAS) said on Friday (Jun 24) that "Singapore’s interbank money markets continue to function in an orderly manner and its banking system remains sound". This is definitely a good move from our government in the midst of uncertainty and ambiguity.

 

Uncertainty in financial markets

 

The full impact of Brexit on Singapore’s economy is heavily dependent on UK’s subsequent trade agreements with Singapore. The UK now is not covered by the existing agreements that EU has, and thus it has to negotiate new agreements. All this takes time and the details are yet to be certain, hence the full extent of economic impact is hard to be determined in this aspect. This has generally been stated as a two year process once article 50 is enacted. However, we can say with a reasonable amount of surety that the above mentioned impact will happen.

 

Short term impact due to the lengthy and complex negotiation could result in temporal disruptions to trade and economic activities with Singapore. Singapore has strong links with the British businesses, due to historic and political reasons this 50-odd years. Singapore accounts for half of UK exports to ASEAN, worth £5.6 billion in 2014. Therefore, such disruptions might hurt Singapore’s economy in industries which has a large UK fingerprint, such as in machinery transport equipment and business services.

 

Local businesses and investments

 

The largest most immediate effect  would be from the depreciation of the British Pound. It has plunged to its lowest level since 1985. Local SMEs who provide services and products to UK MNCs here may be affected if their UK counterparts become more cautious with the weakened British pound. Singapore exports could suffer from the weakening pound as they appear more expensive to UK consumers.

 

In terms of investments, Singapore is a favourite among EU investors, especially from Britain, with about 25% of total foreign direct investment in Singapore coming from there. Britain accounts for three-quarters of Singapore's investments in the EU with big companies like ComfortDelGro and Frasers having a presence there. Foreign Direct Investments (FDI) will also be significantly more costly for UK-based firms in Singapore. They will have to take a more prudent approach in their upcoming investment decisions. With this in mind, Singapore will need to prepare for a fall in investments from Britain.

Opportunities and lessons with Brexit

 

Attractiveness as a financial hub – one man’s loss is another man’s gain

 

London may also lose its standing as the financial centre for Europe as banks move their operations out of the UK. For most Singaporean firms, London is the hub for reaching out to the rest of the European market. With Britain out of EU, firms may need to consider other European alternatives and this includes complexities such as relocation, regulatory adaptations and language barriers. One thing to note is that both Singapore and London are considered first class financial hubs in the world. Following Brexit, London may lose its attractiveness as the key financial gateway to the European market. Combined with the potential growth of Singapore as a smart financial nation, more financial institutions may in turn be attracted to set up their businesses on here.

 

Learning points for Singapore

 

The sterling has fallen, and that is great news for those intending to travel to the UK or are funding their children's education there. In addition, a depreciating sterling also means opportunities for Singaporeans who may wish to buy properties in the UK because of the higher purchasing power.

More importantly, what can Singaporeans learn from this? One lesson I feel poignant at this point is the stark reminder that change is the only constant in today’s world. Britain’s case is much similar to Singapore, where jobs and immigration issues are a common hot-topics in the political sphere. As politics gets more fragmented, solidarity and unity of the people is of utmost importance in such turbulent times. The government needs to stay empathetic to the challenges faced by the ordinary people, and delicately address the issue of jobs and security, while balancing immigration to stay true to our identity. The people of the other hand have to have a certain level of trust in their leaders, and remain unified as one in the face of obstacles. It is a reminder for us to do what we do best; be nimble and adaptive, yet holding on to our roots and principles.

#BREXIT     #GLOBALECONOMY

RELATED POSTS

Article

INNOVATION REQUIRES A NEW KIND OF EDUCATION

 

In his 84 YEARS Thomas Edison lodged over a 1,000 patents and was behind some of the biggest inventions in the history of mankind including the lightbulb...

Read more

Article

the fintech revolution on home-ground

 

I've been keeping an eye on the development of Fintech as a personal interest. While blockchain, micro-lending, remittance, crowd-funding are not new...

Read more

REGISTER INTEREST