Britain’s EU referendum looms: Should Asia brace for a ‘Brexit’ fallout?

With the clock ticking down to a crucial referendum on Jun 23, anxiety over whether Britain will remain a member of the European Union (EU) has risen, evident from the jittery performance in global financial markets this week.

After all, alarm bells over a potential British exit from the politico-economic union – also known as a "Brexit" – have been repeatedly sounded over the past months. Analysts cautioned that a British pull-out from the bloc could send a “serious shock” to the UK’s economy, while prominent figures, including US Federal Reserve chair Janet Yellen, warned of upsets in the financial markets and potential delays in the timing of the next rise in US interest rates.

A clutch of polls this month suggesting that momentum has started swinging towards the “Leave” camp has not helped to soothe investors’ concerns, with ripple effects reaching this side of the world. Asian stocks have fluctuated throughout the week while the Japanese yen, considered the safest currency to hold in the region, strengthened as much as 2.4 per cent to touch a 20-month high against the dollar.

If “Brexit” prevails next week, Asia’s financial markets could be in for further turmoil.

“What we are seeing now is investors preparing for an exit vote and they don’t want to be holding on to risky assets. If the moves become more intensive, which is likely in the case of a ‘Leave’ vote, there will be further turmoil in Asia,” ING's head of research for Asia Tim Condon told Channel NewsAsia.

In particular, emerging-market currencies such as the Malaysian ringgit, Indonesian rupiah and South Korean won will likely bear the brunt of the selling, according to Mr Condon. “Investors will want to sell emerging markets and these three currencies have always been at the forefront when there’s pressure in the market.”

Big moves will also be in store for the yen, which is expected to “accelerate broadly against major currencies” on the back of safe-haven demand, foreign-exchange strategist Yujiro Goto from Nomura said.

Mr Goto thinks a “Brexit” could send the dollar-yen pair depreciating by 2.1 per cent, and as much as 9 per cent in a worst case scenario where there is a sell-off in global equities and the British pound. “If this tail risk scenario materialises, the market’s focus should shift to how global policymakers react. We would not rule out an emergency (Bank of Japan) meeting,” the note dated Jun 13 said.

A stronger currency will be an unwelcome factor for the government trying to shore up a moribund economy, and could spell bad news for Japanese shares which have an inverse relationship with the yen. Earlier this week, Reuters reported a government spokesman as saying that Japan will “closely monitor” how financial markets react to the possibility of a British exit.

“Any appreciation of the yen is most unwelcome because the Japanese economy is (seeing) a very weak transition. In the currency market, I think that's where you will see the greatest impact and there will be some short-term knee-jerk impact on the stock market,” said Mr Geoff Lewis, Manulife Asset Management’s senior Asia strategist in Hong Kong.

Prime Minister David Cameron is spearheading the push to persuade Britons to vote to remain, while former London Mayor Boris Johnson is leading the campaign to exit. (Photo: AFP)

WEIGHING THE ECONOMIC JOLT

Beyond the immediate volatility, market ructions may translate into spill-over effects on regional economies if they persist, analysts warned.

According to State Street Global Advisors (SSGA), Britain’s vote to leave or stay in the EU comes at a time when the two biggest economies in Asia are struggling.

“Look at Japan where ‘Abenomics’ and a massive quantitative easing program seem to have stalled while the world's growth engine, China, is trying to engineer a shift in the economy. You have two major economies that are trying to do major reorganisations and now, the UK could leave the EU which means more uncertainty,” Mr Mark Wills, the Asia Pacific head of SSGA's Investment Solutions Group, told Channel NewsAsia. “(The referendum) could not have come at a worse time.”

Throw in the trade links that Asia has with the UK and other EU countries, a ‘Brexit’, with its potential disruptions to the European economy, could hurt Asian exports. Other knock-on effects come in the form of slower investments from the UK.

“Any decision on capital expenditure or expansion by British corporations will likely be put on hold because the level of uncertainty will go through the roof,” Mr Wills added. “Both regions have established good trading relationships over the years. After seeing global trade collapse over the past few years, it's hard to look at ‘Brexit’ and not think of the impact on trade.”

There are economists who are less pessimistic. Capital Economics’ senior Asia economist Daniel Martin, for one, thinks a downturn in UK demand will pose minimal threat to the region’s exporters.

“There are a few economies in Asia for which a decline in UK demand of this magnitude would have a noticeable effect on growth. Cambodia, Vietnam and Hong Kong all have relatively strong trade ties with the UK,” he said.

“However, across the region as a whole, exports to the UK account for just 0.7 per cent of gross domestic product (GDP). Even a 25 per cent decline in UK imports would knock less than 0.2 per cent off from regional GDP.”

For Singapore, any shock from a “Brexit” would be fairly limited in the near term given that the UK is not among the Republic’s top export markets. According to UOB economist Francis Tan, exports to the UK amounted to S$7 billion last year, a fraction of Singapore’s total exports in 2015 which stood at S$530 billion.

However, the trickle-down effects may be harder to ascertain. UK firms with branches in Singapore may feel the heat from a weaker pound and will start “thinking twice about further expansion”, Mr Tan added. “The situation in the longer-term will also be scary if there’s a drag on Europe’s confidence levels. What if countries like Greece say they would like to leave the EU as well?”

Meanwhile, there are also experts who think that the UK’s loss could potentially be Asia’s gain.

According to DBS’ chief economist David Carbon, the shift in economic gravity from the west to the east is accelerating. "Asia’s growth today amounts to about US$1 trillion each year. That is equivalent to adding the GDP of an entire Germany to the world’s economic map every 3.2 years. Five years from now, Asia will add one every 2.8 years. Five years after that, every 2.2 years."

Should the UK economy - currently the world's fifth biggest - stall due to "Brexit", Asia would be able to fill its shoes and even generate growth amounting to 3 UK economies in the next 8 years. “That’s a lot of growth, and it’s right here.... Worried about a Brexit? Don’t be, at least if you live in Asia," Mr Carbon wrote in a note dated Jun 9.

A "Brexit" flotilla of fishing boats sails along the river Thames on Jun 15, 2016. 

Still, the level of uncertainty surrounding Britain’s fate has unnerved some Asian businesses.

Hong Kong tycoon Li Ka-shing said in March that he would scale back investments if the UK voted to leave the EU. The billionaire, who heads ports-to-retail conglomerate C.K. Hutchison Holdings, has ploughed billions of dollars into various sectors in the UK such as water and natural gas utilities, and most recently attempted to acquire the nation’s second-largest cellphone operator O2.

Japanese firms, with their long history of industrial investment in the UK, have also voiced their concerns. Last month, Hitachi’s Chairman Hiroaki Nakanishi wrote in a commentary published by the Financial Times that Britain’s EU membership was a key draw for many Japanese firms and “the thought that the UK might turn its back on the EU is troubling and hard to understand”.

Echoing that sentiment, Japanese Prime Minister Shinzo Abe said in May that a non-EU Britain would be "less attractive" for Japanese investment. About 1,000 Japanese firms currently operate in the UK and account for 140,000 permanent jobs.

At the Aires Bar in Leeds, northern England, "Vote In" and "Vote Out" beers have been specially brewed and marketed to appeal to voters on both sides of the debate. (Photo: OLI SCARFF/AFP)

Mr Ho Meng Kit, CEO of the Singapore Business Federation (SBF), said “Brexit” could undermine Europe’s stability at a time when the global economy is already fragile, and this implication of a weaker EU could have a “significant impact” on Singapore. One possible consequence could be a further delay or a re-negotiation in the ratification of the EU-Singapore free trade agreement, he said.

“Like Singapore, the UK is an open and dynamic economy. We value UK's influence in the EU as we continue to pursue the ratification of the EU-Singapore Free Trade Agreement. For this reason, our members hope that Britain will vote to remain in the EU,” Mr Ho added in an emailed response.

For Singapore firms with UK operations such as ComfortDelGro and SembCorp Industries, analysts are taking a more sanguine view.

According to CIMB analyst Roy Chen, ComfortDelGro may suffer “some adverse foreign-exchange translation impact on the group's profitability” in the event of a “Brexit”, but a weaker pound would also throw up opportunities for the firm to further expand its UK operation through acquisitions.

A company spokesperson from Sembcorp Industries said a British exit from the EU may not directly affect its UK businesses, which “centres on providing essential utilities on the Wilton International site”. However, the company will be closely monitoring any developments given that “Brexit” could have “implications for the broader business environment and for our customers”.