In a surprising turn of events, the United Kingdom has voted to #leave the European Union. The effects of this historic decision are being felt across the world right now, with global markets facing growing uncertainty and the possibility of a financial crisis similar to the 2008 meltdown not being ruled out. In the immediate aftermath of the so called #Brexit, the British Sterling Pound has plummeted to its lowest in 31 years (10.5% at the time of writing) and the Euro, too, has dropped 6.8%. The Asian market has also reacted negatively, with the Japanese Yen dropping 8% as a result. In the wake of this mayhem, Roar decided to find out what sort of effect Brexit would have on our corner of the world.
To get an idea of the kind of economic impact Brexit can have on Sri Lanka, we need to understand the following:
Sri Lanka sends 10% of all its exports to the UK ‒ that’s up to USD 1 billion. (28.8% of our exports go to the EU as a whole ‒ USD 3 billion). Up to 56% of exports go to the USA and EU together.
On June 15, Sri Lankan Prime Minister Ranil Wickremesinghe expressed his concern about Britain’s probable withdrawal from the EU.
Writing to the British iNews, Wickremesinghe said that he was “very concerned” about the impact the UK’s exit would have on the global economy, on Sri Lanka, as well as on the UK itself.
“Trade is not confined to national boundaries and, as a result, we are all dependent on the global economy recovering from the financial crisis of 2008,” he wrote.
Deputy Foreign Minister Dr. Harsha de Silva today defended Sri Lanka’s decision to actively campaign for the UK to remain within the EU.
“There will [be] huge losses to Sri Lanka because of #Brexit (GSP+). We will now discuss with Britain to have a [new] Economic Agreement,” the Deputy Minister told BBC reporter Azzam Ameen this afternoon.
Economist Anush Wijesinha, who spoke to Roar this morning, concurred. “In the next couple of years we would have to figure out a new trading arrangement with Britain, as it won’t be part of the countries granting us GSP Plus,” he said.
Wijesinha was cautious of making any predictions of doom and gloom just yet, however.
“It’s early days. [But] we need to be careful in general,” he told Roar.
According to Wijesinha, the effects of Brexit will be felt through two main channels:
In the short term, he said, Sri Lanka will be affected by the volatility in international financial markets caused by Brexit. Any impact the vote may have on capital flows to Sri Lanka could also affect the country and our borrowing in international markets.
“Investors are heading for safe-haven assets like the Dollar, US Treasuries, and gold; and the risk appetite for frontier and emerging market investments in countries like Sri Lanka will be much less. The strengthening of the US Dollar will impact the Rupee, and the overall uncertainty will affect our sovereign bond sale,” he explained.
Although, Brexit may mean the US Fed decides to postpone any further rate hikes, which, according to Wijesinha, could actually help matters.
In the more medium term, however, the impact on Sri Lanka will come from the exports channel.
“If predictions around the economic impact of Brexit on the British economy come true, we could be looking at a serious slowdown there; and the effect on our exports could be substantial,” he said.
Over half of Britain’s imports are from the EU. A slowdown in economic activity and dynamism there as a result of Brexit, warned Wijesinha, can negatively affect our exports to Europe.
Meanwhile, a source from John Keells Stock Brokers said that a weaker British economy would have some knock-on effects for Sri Lanka in terms of weaker demand for exports ‒ especially for garments. However, the company believes that in the longer term, easier trade conditions to the UK might a possibility; though the positive impact of a return to the EU’s GSP+ scheme will likely be lower.
A decline in higher spending UK tourists would also impact tourism to a certain degree, the source said, adding that UK arrivals have been growing at a higher rate than total arrivals.
“The calendar year 2015 had 161,000 UK tourists which was 9% of the total 1.8 million arrivals. This will have more disproportionate impacts on the established operators and boutique hotels,” they said.
Echoing Wijesinha’s sentiments on sovereign bond sales, John Keells Stock Brokers said that an immediate effect of the Brexit would be that a negative, global turmoil could delay issuance and also lead to higher pricing (possibly >8% level).
“The US dollar increasing in the face of a global fight to safety will put some pressure on the Rupee to depreciate. We could see 150+ levels at least temporarily. While recent weeks have seen a net foreign inflow into domestic treasury markets this trend could halt over the near term until the volatility settles down,” the source said.
Wait and See
As mentioned above, it’s still early days. A better, more nuanced reading of the fallout of Brexit will obviously take a while.
“On all this, we have to wait and see ‒ the effect won’t be known right away. Unlike the effects from financial market volatility, which are panning on right away, the trade effects would likely take some time to materialise,” said Wijesinha.
What with British Prime Minister David Cameron announcing his resignation in the wake of the vote and the EU declaring its willingness to “speed up” the exit process, the next few days should be interesting, to say the least. Watch this space for more updates on how these developments could affect Sri Lanka in the weeks to come.
Featured image courtesy: politicsinbritain.ideasoneurope.eu