The Brexit dilemma – different scenarios and how they might affect your business
(This guest article was provided by Clear Treasury, an Associate Founder member of Cambridge Cleantech.)
With Brexit and the March 29th EU leaving date fast approaching, uncertainty in the currency markets is making it difficult to plan ahead and know how to best mitigate your foreign exchange risk.
And with many commentators looking to the long-term (an exercise we think is based too much on hearsay and hyperbole considering the current climate) it can be hard to discern what’s actionable advice from white noise.
Here we look at the short-term consequences of the four possible Brexit scenarios for companies both importing and exporting their goods to the EU and wider global markets. We’re not going to tell you what’s going to happen, we’re just going to give you the current facts to make an informed decision, because we don’t want to add to the noise of Brexit, we want to cut through it.
If you want to talk about how Brexit is likely to affect your business over the coming months and stay up to date on how currency fluctuations can affect your business, get in touch with firstname.lastname@example.org or +44 (0) 207 151 4873.
Extension to Article 50
The UK doesn’t leave the EU on March 29th as scheduled, but works towards a new leave date hopefully with clear reasoning for the extension and a plan for how to meet the new deadline.
An extension to Article 50 would certainly weaken the possibility of a no-deal Brexit – for now at least. And over the past six months, sterling’s trajectory has become intrinsically linked with the possibility of a no-deal outcome: no deal off the table and sterling strengthens, but back on the table and sterling weakens. As an indication, as a no-deal outcome has been further distanced, GBPUSD is currently up 3.2% this year and GBPEUR is currently up 4.9% this year.
Despite this temporary relief from no deal, an Article 50 extension will only increase market uncertainty and thus weaken sterling should no progress be made long term. This is bad news for importers as you’ll thus see costs rise, but better news for exporters who’ll benefit from the stronger pound.
The UK’s current trade arrangements with the EU (and indeed much of the rest of the world) would cease to exist at midnight on March 29.
For importers, no-deal is the worst case scenario. The resulting drop in sterling value (estimated to be 10-15%) would weaken it not just against the euro but all major currencies, making imports more expensive and weakening global buying power. The introduction of new import tariffs will only add to costs and complexity.
For exporters, the costs of new tariffs should be mitigated by currency gains a fall in sterling would deliver. However, while the average World Trade Organization (WTO) tariff stands at 9%, it can apply tariffs as high as 39%. This would be far greater than the estimated currency gains, so there’s a possibility certain sectors may still see significant cost increases.
On top of this, potential barriers on certain imports could affect trade for both importers and exporters who would both be bound by the same rules.
Theresa May’s deal goes through
Parliament votes to accept the Prime Minister’s deal and we leave the EU as planned on March 29th.
In the short-term, sterling’s value would likely improve marginally (up to 3%) in reaction to the current market instability and then carry momentum over the next two to three years to see a return to pre-Brexit levels.
For importers, getting a deal would see an immediate return to market stability with fewer, less dramatic currency fluctuations making it easier to trade and import. And of course, any increase in sterling’s value will reduce costs.
For exporters that increase in sterling value will make goods more expensive which may deter international buyers. However, stability is a good thing for both sides as it makes it easier to plan with greater accuracy and set future investments and transactions with confidence.
This should also see the end of the uncertainty that has dramatically impacted foreign direct investments – Nissan closing its Sunderland factory, Mercedes cancelling plans to move production to the UK, Dyson moving its HQ to Singapore, all due to the uncertainty surrounding Brexit. A stable market means greater business certainty and more willingness for overseas business to commit to long term employment and investment in the UK.
The outcome of a second referendum is widely expected to be a vote for no Brexit at all, if it ever happens. Clearly though, this is an impossible-to-predict long-term outcome which we won’t hypothesise on now.
What it would inevitably mean in the short-term is a continuation of the instability blighting markets, which only means more uncertainty for importers and exporters alike. But we, nor anyone else for that matter, is in a position to accurately predict how long that may last or what the long-terms effects might be.
Clear Treasury provides bespoke treasury solutions to mitigate exchange rate volatility, which helped hundreds of clients over 2016 during the referendum result. And once again there’s now the possibility of another 10%+ fall for sterling, or a 5-10% rally depending on which deal is agreed with the EU. Please get in touch to see how we can help you mitigate the risk of Brexit for your company.