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By: Luke Walden, FX Expert, Godi Financial

November 2017

As David Davis (UK Brexit Secretary) and Michel Barnier (Chief EU negotiator) close in on 7 months of Brexit negotiations, it’s worth looking at how far they have come and whether a deal that is beneficial for both parties is a distinct possibility. Sceptics raised concerns from the beginning questioning whether a deal could ever be struck, let alone within the two-year window that was set.

The only other country to democratically vote themselves out of the EU were Greenland in 1985. Not part of Europe but ruled by Denmark, Greenland joined the EU (then the European Economic Community EEC) in 1973, the same time as the UK, but voted a decade later to leave. Greenland had one main industry and source of revenue, fishing, and its population was around 55,000 people. Nonetheless, it took almost three years to agree a negotiation and a divorce from the bloc. 

The UK is a behemoth in comparison and the thought of negotiating a fair deal for both the UK and the EU member states within two years, considering the complicated process, does strike fear in to many. For some hardened Brexiteers that is met with a shrug of the shoulders. Indeed, some large corporations have indicated they do not as yet have a contingency in place for a ‘no deal’ scenario as they feel there is adequate time to plan if the need occurs.  However, it’s generally regarded that businesses in the UK and in Europe should start, at the very least, to think about how they might manage such a scenario if it came to it.

The UK Chancellor, Philip Hammond, has recently been ostracised by many for refusing to budget for a ‘no deal’ outcome. In response, Mr Hammond counter argued he had been misinterpreted saying, “We have to be prepared for a no deal until we have clear evidence we will not have a no deal.” He went on, “What we’ll need to do is determine what is a realistic worst-case scenario that we need to plan and invest for.” So, although he’s willing to prepare and budget for a ‘no deal’ scenario, it seems he’s not prepared to provide visibility on any projected plan. It is fair to say there are conceivably thousands of potential outcomes from the negotiations. You can’t prepare for them all. It seems what Philip Hammond has expressed seems perfectly reasonable.

So what would a ‘no deal’ actually mean? Well, as it says on the tin, there would be no formal agreement between the UK and the EU at the end of the two-year window and the UK would leave the European Union on 29th March 2019. It is impossible to predict what that will mean on a day-to-day basis but from an international trade viewpoint, the UK would conform to the World Trade Organisation’s (WTO) rules pretty much overnight.

Tariffs would be added to both imported and exported goods. Some argue that as the UK is a net importer of goods and services and that exporting tariffs will outweigh importing tariffs, the UK may actually be better off (all things being equal) in this instance. Some exporters however will be hit particularly hard, namely farmers. The industry may see costs rise by up to 40% for exporting to the EU – this may make it unviable to carry on doing so for some. Sterling is forecast to likely see another slump against its peers which may shine a ray of light on some exporters of goods, but will cause UK importers further strain. UK as a whole import around 50% of its food.

Import and export businesses should be aware of how the uncertain nature of the negotiations can, and will, impact their bottom line from a more fundamental perspective. Over the referendum, Sterling plummeted around 10% meaning those UK importers without relevant protection saw costs rise, and subsequently their bottom line reduces, overnight. Since September 2017 to the present day, Sterling has fluctuated by up to 5% – 10% in both directions against the Euro based largely on political instability.

EasyJet reported soon after the Brexit referendum their annual profits which missed analyst estimates due in part to a £90 million foreign currency hit. Their core business was strong and ticket sales were buoyant, but simply being on the wrong side of a falling Pound had been disastrous.

Financial markets are constantly reacting to major news events, and none come close in recent times to Brexit. Small and medium sized businesses should put protection in place by locking in exchange rates as far forward as possible to reduce, or in some cases eliminate unfavourable market movements. The Brexit negotiations are here for (at least) the next 16 months and it is inevitable there will be continued volatility in Sterling which needs to be managed appropriately.

In the larger corporate sphere, businesses would lose their passporting rights which allow them to sell their products and services in to the EU without having to obtain licenses in each individual country. A good example would be banks based in the City of London who at the moment are able to do business throughout the EU without setting up a subsidiary in that EU country or relocating to it. A ‘no deal’ would immediately put an end to that. Lloyd Blankfein, CEO of Goldman Sachs, tweeted in mid-October, “Just left Frankfurt. Great meetings, great weather, really enjoyed it. Good, because I’ll be spending a lot more time there.” A strong indication of his plans should Brexit negotiations stumble to a dead end.

It’s estimated that businesses maximising passporting rights leads to c.£9 billion as revenue for the UK each year. The Bank of England has said potentially up to 75,000 finance professional jobs could be lost in the immediate aftermath dependant on what deal is finally agreed. The Bank believes those that may lose their passporting rights might look to relocate away from the UK to the European Union. It’s worth noting that figure is disputed by recent polls and the Brussels-based think tank, Bruegel, which believes UK job losses would be around 30,000 and over a far longer period.

EU nationals currently residing in the UK and likewise UK nationals living in the EU, would have to contemplate uncertainty around their individual rights.  This would affect around three million EU citizens in the UK and around one million UK citizens in the EU although Theresa May has previously reassured that everything would be done to help these people in the worst-case scenario. You hope decency will prevail here. Scaremongers have highlighted flights may be stopped for a period of time although Philip Hammond thinks that highly unlikely saying while it’s “theoretically conceivable”, no one thinks that’s where we will end up.

Clearly, there is a raft of documentation and regulations to sift through when looking at the negotiations and any ‘no deal’ outcome which ironically strengthens the case for exactly that. Understanding it all is almost impossible and begs the question, again, why the general UK public were ever left to decide something so complex and monumental.

Businesses that deal overseas will be looking very closely at developments over the coming months and it will be interesting to see how things are handled. No matter which side of the referendum fence you stand, everyone in the UK, from market stall holders to large corporate companies need to work together and tread the best path through the woods. Hopefully most will find their way without snagging on too many branches along the way.

Where next?

Protect your business against the risk of currency volatility.  

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