Pound-earners feel Brexit crunch

NELFA Segovia, a Filipino nurse who immigrated to Oxford, England 15 years ago, feels the piggy bank getting slimmer everyday with the erosion of the British pound’s purchasing power since the United Kingdom (UK) voted to leave the European Union (EU). She regularly wires money to the Philippines to support her two college-aged children and her mother.

“Because of the lower exchange rate, I have to send a bigger amount to offset the loss,” said Segovia. In just a few years, the Filipino nurse who is currently working at the UK’s publicly funded healthcare system National Health Service, would also be retiring.

On June 23, the British sterling sunk more than 10 percent against the US dollar as Brexit votes dominated the UK referendum. In just a day, it hit its lowest level in over three decades. It continues to be under pressure up to this day.

It turned out Segovia, who became a British citizen in 2006, was among the 53.4 percent of voters who favored a Brexit, an amalgamation of the words “British” and “exit.”

“I voted for exit because most of the laws here are regulated by the EU. There is no border control [such] that anyone from the EU can come and work. And because the UK has a good benefits system and as an EU member, they can avail of the free health and education and also help from government. The UK pays millions of British pounds to fund other EU members when the country itself is in need of funds,” Segovia said.

Tim Catacutan-Bathan, a chef who immigrated five years ago with her two boys to join her Filipino husband in London, echoed the same. “It feels bad to send [smaller] money to the Philippines,” she said.

The Bathan family is also now bracing for a slowdown in the UK economy.

“We just purchased a house at a very high cost,” noting the market value of the property is expected to fall. “Interest rates, we hope, will not rise,” she said.

During the Brexit referendum, Bathan abstained. “Most of my questions have no answers yet,” she said, admitting she shares the skepticism of most British citizens on EU’s abuse-prone border controls.

Segovia and Bathan are among the estimated 250,000 Filipino migrants and workers in the UK. Last year, they wired to the Philippines about $1.4 billion or about 5.6 percent of the remittances that flowed into the country.

Filipinos in the UK were split over the recent Brexit vote, both women reckoned, when asked about the sentiment of the Filipino-British community. “Although there is a strong move toward another referendum, it’s not widely discussed in our community here. They are more concerned [as to] when the pound will pull itself up and when there will be a new prime minister,” Segovia said.

Shocking decision

For the rest of the world, which has been used to recurring Grexit (Greece’s possible exit from the Eurozone) woes, the Brexit decision came as a big shocker. The UK, for one, is not the weakest link to break away from the EU.

“Online polls got it right, bookies and the markets got it wrong,” Citigroup said in a research note on June 24 as the referendum results came in.

More than 30 million British citizens voted during the referendum. The turnout of 71.8 percent was the highest since the 1992 general elections.  David Cameron stepped down as prime minister of UK shortly after.

In the end, concerns over sovereignty and lack of immigration controls resonated more with the voters than concerns on economic fallout. England itself voted strongly for Brexit along with Wales, while Scotland and Northern Ireland both wanted to “Bremain.”

The Brexit vote came about largely for two main reasons: First, the sizeable disconnect between a frustrated population and the political establishment; and second, the concerns of UK citizens about migration were more paramount than the economic disruption that a departure could cause, JP Morgan said in a June 24 research note.

Forecasts

According to JP Morgan, the exit process would be lengthy and difficult, characterized by an aggressive gnawing on the economic growth of both the UK and the EU.

JP Morgan added the near-term consensus forecast sees Brexit pulling down by 1.1 percent the UK’s annual gross domestic product (GDP). The best case scenario was a decline of 1.6 percent while the worst case scenario was a 4.2 percent drop over a five-year period.

JP Morgan itself sees UK growth next year to be 1 to 1.5 percentage points lower than it would have been had the UK remained in the EU. It was also seeing euro area growth to be around 0.5-percentage points lower.

A slow down in the growth of the European continent would also likely affect the global economy. JP Morgan trimmed global growth forecast by 0.2 percent for next year, with modest further downside risk. This brings global forecasts closer to the 2.5 percent cruising pace the world economy has held for the past five years, the bank added.

The consequences were more uncertain if the markets looked further beyond, JP Morgan said.

While most of the discussion during the campaign focused on the future trading relationship between the UK and the rest of the EU, the exit agreement has to cover many other things as well, including commitments under the EU budget, cross-border security arrangements, cooperation on foreign policy, transfer of regulatory responsibilities, movement of EU agencies, fishing rights, and the legal status of UK citizens residing in the other parts of EU and EU residents in UK, the bank noted.

Article 50 of the Lisbon Treaty, the route by which members leave the EU, provides that without a unanimous vote from all 28 member states to extend negotiations, treaties they previously signed would cease to apply to the UK after two years even if a withdrawal agreement has not been reached.

The UK would have to negotiate new trade agreements with the rest of the world. UK has over 50 bilateral, free-trade agreements negotiated by the EU, all of which would be nullified once UK officially exits the union.

Analysts believe it would take over a decade to replace all these trade deals.

This breakup with the EU was seen to trigger internal challenges as well. Note that while England itself strongly backed Brexit, Scotland and Northern Ireland both voted to stay in the EU.

“The SNP (Scottish National Party) is likely to press for another referendum on Scottish independence before the UK formally leaves the EU. Although the decision to hold a referendum lies in the hands of the central government in Westminster, denying Scotland another referendum is likely to cause support for independence to build. In addition, the possible reinstitution of border controls in Ireland would likely create difficulties in managing relations between north and south of the border,” JP Morgan said.

For Citigroup, a referendum risk, alongside a fragmentation risk and the rise of nonmainstream political parties and movements, was most apparent and disruptive in Europe.

“The UK’s vote to leave the EU could be a watershed moment in terms of vox populi risk. It raises the question if and how other EU countries could follow its example, and ultimately whether the UK’s pro-Brexit referendum result heralds a wider systemic political risk that threatens the EU project over the medium to long term,” Citi said in a July 2 research note entitled “Who’s Next? EU Political Risks After The Brexit Vote.”

The economic performance of the UK after its Brexit vote might well affect referendum risks in other EU countries, Citigroup said. “If the UK performs well, other countries may be encouraged to pursue an EU exit, while poor performance in the UK may well deter similar efforts elsewhere.”

 

Headwinds for PH?

The Brexit impact is being transmitted to the Philippines through four channels: Trade, investment, financing and remittance flows.

Philippine exports to the UK accounted for less than 1 percent of total shipments in January to April this year, while imports from the UK also accounted for less than 1 percent.

“Lack of sizeable trade flows with the UK easily dismisses Brexit risk implications on trade,” Citigroup economist for the Philippines Jun Trinidad said in a research note. However, he noted the Philippines might still have opportunity losses as EU’s generalized system of preferences in trade and other investment schemes/benefits, particularly for those applicable to UK market access, could get downgraded in a Brexit scenario.

Frederic Neumann, an economist from British bank HSBC, said Asian economies’ trade exposure to the UK was minimal. He said risks to direct bank financing from UK financial institutions appeared manageable.

“The impact of currency swings, in particular a stronger yen, is harder to judge, tightening financial conditions for emerging markets in the region,” Neumann said, citing the pressure for the Japanese currency to appreciate against major currencies as investors seek “safe haven.”

Aside from the Japanese yen, other assets generally perceived as “safe havens” in times of risk-off situations include gold and US Treasuries.

“Still, the fragility of the West, economically as well as politically, is a reminder that Asia can’t count on an export rebound any time soon to lift ailing growth. Reforms are urgently needed to put local demand growth on a more sustainable path,” the economist said.

 

Globally competitive

For Citi’s Trinidad, the country’s global competitiveness rather than the Brexit risk was the more important issue.  “While these EU-trade benefits/concessions play a part, Philippine competitiveness in attracting FDI from UK, EU or other advanced economies remain the key issue,” he said.

Aside from stronger local markets predicated on the next government’s policy agenda, Trinidad cited measures that should cut the costs of doing business and attract foreign direct investments (FDIs) here: Liberalization of foreign ownership limits in infrastructure, utilities, and other services; allowing more competition; strengthening labor practices/standards; streamlining bureaucratic procedures/processes, jumpstarting infrastructure projects under the public-private partnership (PPP) framework and aggressive spending on national/regional infrastructure projects.

The Philippines’ trade relationship with the whole of EU was much more significant. In 2015, Philippine exports to EU amounted to $654.98 million or 14.1 percent of total merchandise exports. This went up by 35.5 percent from the previous year’s level.

To date, there are about 200 British companies doing business in the Philippines, including well-known brands such as Unilever, Shell, HSBC, Standard Chartered, AstraZeneca, Diageo, Arup, JCB, Marks and Spencer, River Island and Halcrow.  Some of them have already been in the country for over a century, like Standard Chartered, which is the oldest foreign bank in the Philippines. As long as consumption-driven Philippines provides good business for them, they are unlikely to pull out of this market.

In terms of new FDIs, about $372.16 million came in from the UK in 2015, more than the $141.94 million posted in 2014, based on data from the Bangko Sentral ng Pilipinas. This accounted for about a fifth of FDI inflows seen by the country last year, excluding money from reinvested earnings and debt instruments.

On new FDI approvals, Citi’s Trinidad noted commitments for first quarter of 2016 amounted to P4.8 billion or 1.9 percent of total.

 ‘Hot money’

Meanwhile, Trinidad also noted the British pound only represented a fragment of public and publicly-guaranteed debt. This was still dominated by US dollars (with a 69.7 percent share), Japanese yen (24.3 percent) and euros (3.5 percent).

On UK portfolio or “hot money” investments in the Philippines, referring to those invested in liquid assets like publicly listed stocks and fixed income instruments, Trinidad noted these amounted to only $190 million or 2.4 percent of total 2014 portfolio investments.

“Shallow trade and investment exposures to UK imply limited financial reliance on UK markets,” the economist said.

Trinidad said a Brexit scenario would inevitably have some “portfolio effect” as the risk-off sentiment won’t likely spare local financial markets. As such, he said the peso was likely to resume its weaker trading range while other risk asset markets may give up some recent gains.

“But we believe market volatility prior to the UK referendum offers buying opportunities. Positive legacy issues from the … Aquino government, sans continuity risk post-elections and favorable policy signals from the … Duterte government bode well for prospects of over 6 percent growth annually,” he said.

Remittance effect

Segovia and Bathan said the foreign exchange effect related to Brexit jitters was now being felt by other Filipinos who are earning pounds and sending a fixed peso equivalent to the Philippines.  While it remains to be seen whether Brexit would batter the UK and EU economies enough to cut jobs, migrant labor simply have to bear the burden for now.

“Our market remains strongly insulated against Brexit although we might see a possible dip in OFW remittances in the region if the UK plunges into recession,” said Victor Felix, an analyst at local stock brokerage AB Capital.

“Unless UK jobs and income prospects worsen, Brexit risk need not disrupt remittance flows,” Trinidad said.

A significant slowdown in the eurozone as a result of Brexit would have a more significant impact on the Philippines, said ING Philippines economist Joey Cuyegkeng. He noted Europe accounted for 15.5 percent of total OFW cash remittances (worth $25.8 billion) that entered in 2015, while exports to Europe accounted for 12.6 percent and imports from the continent was 11.4 percent of total bill.

“[Policy] makers in major economies are likely to respond to moderate the impact of Brexit. A more modest slowdown is possible. The likelihood of extending or enhancing monetary accommodation has increased. Fiscal stimuli are also likely especially for major economies that have significant fiscal leeway,” said Cuyegkeng.

The next impact of the Brexit vote would be felt as UK negotiates with the EU on the disengagement, tackling trade and investments, among others, he said.

While economists agreed Philippine economic fundamentals were strong, there was no consensus on how wide the policy leeway should be for local regulators to offer stimulus. Most agree that fiscal, rather than monetary stimulus, would work best.

“We believe that the economy can withstand such external developments. Higher fiscal deficit spending focused on higher infrastructure spending and greater disposable incomes would likely keep Philippine economic growth in the area of 6-7 percent,” Cuyegkeng said.

“Structural inflows are likely to remain high with a modest impact from Brexit on the assumption that economic policy makers in other economies including host economies would implement counter measures to offset chances of significant slowdown,” he added.

For immigrants like Segovia and Bathan, optimism still runs high.

Segovia could only hope EU’s ice-cold treatment of UK would be temporary. She reckoned it’s part of the “bullying tactics” to dissuade other countries in Europe from following the UK’s move.

“We are still part of Europe. But it seems they are pushing that we don’t want to be in Europe. But, we are, geographically, and will continue having business with the rest of Europe and the world,” she said.

Within the Filipino community, Segovia said “everyone wants to get on with life and to deal with it.”

Like many others, Bathan lamented the uncertainty and the lack of any clear information or platform on the Brexit terms.

“We are not as worried as EU nationals because most of us have legal British-issued papers to start with. We went through very strict immigration screening. Until the divorce paper starts to take shape within the next two years, we won’t know [what will happen]. It will be wait and see,” Bathan said.

“But Filipinos are resilient.  We’ve seen worse. Life goes on. We’re hopeful that the negotiations will be for Britain’s best interest,” she added.

For Segovia, there were a lot of things the UK government could to do make lives better for its citizens. “I guess the Brexit [result] shook them a bit. We are hopeful for the future for better governance and the UK government won’t have the excuse that it (blunder) was the EU’s fault.”