Don’t underestimate the ripples from Brexit

Jose M. Galang

Posted at Jun 24 2016 10:52 PM

Children pose next to a chalkboard advertising a Brexit viewing event at "The Churchill Tavern", a British theme bar, on the day where Britain votes whether or not to remain in the European Union in the Manhattan borough of New York, U.S., June 23, 2016. Andrew Kelly, Reuters

It might not be wise to underestimate the potential impact on the Philippines of Britain’s exit (Brexit) from the European Union (EU). The incoming top official of the Department of Trade and Industry has been quoted by media reports as saying that the effects of Brexit on the Philippines will be “minimal”.

Judging by the reaction of the financial markets across the globe to the ‘Leave’ vote, the coming economic fallout is bound to hit the Philippines in any number of ways. Britain is a highly globalized economy and the Brexit vote’s effects are bound to come from different directions that may not be obvious to some.

The Philippines may experience this Brexit tsunami—not mere ripples as some analysts insist—not only from Britain and the rest of the United Kingdom directly but from other countries and regions that have economic ties with the new Europe divorcee.

WATCH THE CONTAGION

Bangko Sentral ng Pilipinas Governor Amando Tetangco cites a need to “watch the [Brexit] impact on [the Philippines] via contagion from moves in the US dollar”.

In the hours after the result of the ‘Leave’ or ‘Stay’ referendum, the British currency, the pound sterling, took a beating in the markets, plunging to a 31-year low against the US dollar. That means instant losses for businesses or economies with large revenues coming from British corporations or industries. Share prices of UK companies wobbled on equities markets, and a number of large British companies immediately announced plans to amend future expansion plans.

On the other hand, fund managers escaping from the pound put their money on the Japanese yen, pushing up above 100 its rate against the dollar.

As a result of these movements, the British pound was fetching around P63-P65 just after the Brexit referendum from P67.50 last week. It is also now costly for holders of Philippine pesos to purchase Japanese yen, at around P0.46-P0.47 per Japanese yen compared to last month’s P0.42-P0.43.

With a deployment rate of over 30,000 individuals a year, the number of Filipinos in Britain is estimated at around 250,000. They send home through the banking system more than $1.53 billion a year, representing about 6 percent of all OFW annual remittances.

Foreign direct investment (FDI) flows into the Philippines from the UK totaled $373.16 million in 2015, a big leap from $141.94 million in the preceding year. In the first three months of 2016, there was a slowdown to $5.65 million from the year-ago $16.27 million. In the whole of 2015, UK direct investments comprised 6.5 percent of the total overall for that year.

In terms of merchandise trade, total Philippine exports to the UK in the first four months of this year amounted to $150.61 million (0.9 percent of the total) while imports reached $168.05 million (0.7 percent of the total imports).

OUTLOOK GLOOMY

If the UK’s unbundling from the EU results in a recession, these investments and trade numbers could only go down some more. But it is the hiring of Filipinos and their remittances that could be hardest hit. After all, immigration was the biggest issue that the Britons had with the EU that led to the Brexit phenomenon.

If the Brexit shockwaves lead to a general weakening of the EU community, as some economists suspect, the Philippines could also take a hit as a result. The EU nations combined for $317.2 million of annual FDI flows into the country last year, according to Bangko Sentral data.

A survey by the fDi Magazine shows that 60 percent of emerging market companies in the UK “do so primarily as part of a regional European strategy”, writes Courtney Fingar in the latest issue of the publication that focuses on foreign direct investment flows worldwide.

“While certainly some small companies and entrepreneurs say they welcome the idea of being free from Brussels-born red tape, others are in a panic. Freedom from EU does not necessarily mean less, or better, regulation, and it can instead mean new barriers that could break small businesses,” Fingar says.

After the exit from the EU, foreign investor companies now risk losing preferential access to European markets. These fears were raised during the campaign period leading to the referendum, but the business leaders’ appeals fell on deaf ears.

Analysts at the International Monetary Fund (IMF) have projected that a long period of negotiations for new trade relations with the EU would leave an inward-looking Britain saddled with a weak currency that could ignite a financial crisis and limit investment and consumer spending.

In that kind of a scenario, the IMF predicts Britain plunging into a recession, with unemployment expanding, real wages stagnating, and inflation gaining speed.

A report that came out this week in The Wall Street Journal, authored by Greg Ip, said that the greater consequences of Brexit would be “more subtle, gradual, and global.”

Brexit, the article said, is the “starkest repudiation yet” of the post-war consensus favoring ever-deeper global integration, noting further that that consensus is “already fraying” in the face of growing protectionism and anti-immigrant sentiment worldwide.

“A further unravelling would undermine global growth prospects already clouded by aging population and miserable productivity,” the WSJ analysis said.

Why have the Britons ignored these warnings from prominent world leaders (from US President Barack Obama to Pope Francis) and opted to deliver their country into a state of uncertainty?

POPULIST REVOLTS

Anatole Kaletsky, a noted economist who used to write for the Financial Times and the International New York Times, said in a think piece he wrote for Project Syndicate last week that the Brexit referendum is part of a global phenomenon: “populist revolts against established political parties, predominantly by older, poorer, or less-educated voters angry enough to tear down existing institutions and defy ‘establishment’ politicians and economic experts”.

A common feature in rich countries seeing these populist rebellions is although unemployment rates are low, many of the jobs created pay low wages, and “immigrants have displaced bankers as scapegoats for all social ills,” said Kaletsky.

Following Brexit, he added, financial markets and businesses around the world will be “shaken out of their complacency” about populist insurgencies. “These heightened market concerns will, in turn, change economic reality. As in 2008, financial markets will amplify economic anxiety, breeding more anti-establishment anger and fueling still-higher expectations of political revolt.”

“The threat of such contagion means a Brexit vote could be the catalyst for another global crisis,” Kaletsky concluded. “Those who vote for populist upheavals will have no one but themselves to blame when their revolutions go wrong.”

In the Philippines, a new government — itself swept to power by a populist movement — will take the reins of power on June 30. It should tread most carefully in an immensely fragile and angry global environment caused by Brexit.