Says China slowdown, tapering, bigger problems than Brexit
Brexit fallout does not pose an immediate direct risk to Asia-Pacific (APAC) sovereigns and its financial systems as much as China’s slowdown and the United States’ Federal Reserve decision on the pace of monetary tightening pose on the region, according to Fitch Ratings. Downplaying the impact of the Britain’s decision to leave the 28-member bloc after 43 years has on APAC economies, Andrew Colquhoun Senior Director— Sovereigns said it would not have an, “immediate direct ratings impact”, on both regions’ sovereigns and banks. However, the global rating agency did not rule out the possible downward revisions into region’s growth projections depending on the severity of the rising political uncertainty in Europe. It was only this week the economists at Morgan Stanley said Indian and Philippine economies are the least exposed to the impacts of Brexit in Asia but Hong Kong, Singapore and Malaysia are among those with highest exposure. Therefore, they said, the immediate impact on these economies of Brexit would be through the financial channel due to volatility in exchange rates and capital market flows.
The day following the Britons voted 51.8 to 48.2 to leave European Union on June 24, British pound (GBP) fell as much as 11 percent against the dollar – the lowest in 31 years but the currency have been recovering this week. On the contrary, HSBC in an equity research strategy report compiled on the same day on Pan Asian region said, the extremely high volatility in currency markets would raise the discount rate and therefore will lower the valuations of the region’s equities. Meanwhile, the stronger dollar post-Brexit could also translate the dollar assets (or debt) into higher local currency assets (or debt) creating translation effects. However, some of the asset managers see the Brexit having a limited impact on Asian dollar bonds.
They say the localized investor base of these bonds have acted as a shield from global shocks and point out the relative stability in the Asian bond market post-Brexit. Fitch’s Colquhoun meanwhile said the prolonged uncertainty post-Brexit could weigh on investor and consumer confidence resulting in tighter liquidity conditions and pressure on capital markets, leading to a knock on effect on the region’s growth. “This is especially the case for more trade-integrated economies such as Singapore, Taiwan, Hong Kong and Korea,” he added. He, however said, the Asian markets’ reaction to Brexit has far more muted than in Europe and Fed’s slow pace of rate increases could also play a key
UK could emerge quicker on trade liberalization
Dispelling the claims that Brexit was a move for trade protectionism, Fitch said the United Kingdom as a country outside European Union (EU) might be able to make quicker progress on trade liberalization with Asian countries than as a member of the EU.
The Brexit campaign was branded by certain quarters as a growing discontent on globalization and was movement on anti-trade, anti-immigration and antiestablishment. “It is possible that the UK’s exit from the European Union could be seen as a broad response to free markets, across trade, capital and labor. If so, this development could raise questions around higher barriers to trade and a potential shift to greater market protectionism,” the HSBC said last week. However, Fitch sees the direct impact Brexit has on UK’s trade with Asian economies is likely to be limited. “The UK is the world’s fifth-largest economy, and Fitch expects a slowdown in short-term GDP growth as a result of the referendum.
But exports to the UK equate to less than 1 percent of GDP and account for less than 3.5 percent of total exports for every Asian country,” Fitch’s Colquhoun said. However, APAC member, Sri Lanka remains an outlier as 10 percent of its exports reaches the UK and the cheaper GBP could lower the rupee equivalent of such exports. Meanwhile, the rising Japanese Yen post-Brexit due to immediate flight of capital in to safer currencies could also pose risks to the country’s export sector and will pose challenges for Japan in its fight against deflation. However, Fitch is of the belief that the Brexit could lead to a broad slowdown in EU markets over a prolonged period, which will have significant indirect trade effects on Asia as EU accounts for much larger share of Asian exports than UK alone. Smaller EU economies are more vulnerable than larger economies such as Germany and France which account for bulk Asian exports.
No immediate risk on APAC banks
Fitch also assured that APAC’s banks do not have an immediate direct rating impact from the Brexit fallout as the risks are more indirect than direct. “But emerging Asia accounts for less than 15 percent of the total external claims of UK banks, according to BIS data.
Singapore and Hong Kong, as offshore financial centres, are more significantly exposed relative to the size of their economies, but these are mainly local/ regional claims from UK subsidiaries and unlikely to see significant withdrawal as a result of Brexitm”, Colquhoun said. It was only last week Fitch downgraded National Development Bank PLC (NDB) due to its declining capital adequacy levels in line with its continued strong loan growth and weaker profitability and revised the outlook of Sampath Bank PLC and DFCC Bank PLC to ‘negative’ from ‘stable’ a day prior to Brexit results were known.