Currency volatility biggest Brexit worry for S’pore firms

SINGAPORE — Local companies doing business with Britain are expected to be hit by currency volatility and concerns over growth in the United Kingdom and Europe in the event of a vote in favour of a British exit from the European Union, while UK companies with operations here may have to scale back activity if the pound plunges, said economists yesterday.

With a week to go before the June 23 referendum, latest polls yesterday showed that Britons will choose to leave the EU.

British Prime Minister David Cameron warned that the economy will fall into a tailspin if Britain exits the EU, while Europe’s largest bank HSBC said that the pound could fall as much as 20 per cent. The so-called Brexit uncertainty played a part in the US Federal Reserve’s decision to keep its benchmark interest rate unchanged on Wednesday.

The impact of a Brexit on Singapore companies with exposure to the UK market would be elevated currency volatility as well as potential pound interest rate volatility amid adverse growth prospects in the UK economy, said Ms Selena Ling, head of Treasury Research & Strategy at OCBC Bank.

The bigger question, however, is what will happen to Europe post-Brexit, given the foreign direct investment from the EU less the UK accounted for a more substantial 17.3 per cent of Singapore’s total FDI. The UK accounted for 6.1 per cent of Singapore’s total FDI.

“Does it encourage more members to consider breaking away and damage regional business investments and growth prospects in the medium term, or will Europe recover faster as financial institutions relocate out of London to Europe? The key risk-opportunity for Singapore would be the impact of the Brexit on the rest of EU markets in relation to Singapore, rather than the Brexit’s impact on the UK itself,” said Ms Ling.

Mr Michael Wan, economist at Credit Suisse said: “The macro impact could be larger if Brexit negatively affects the EU economy. In this scenario, the effect on Asian economies’ exports could be two to three times larger than that of an isolated UK downturn, with Singapore and Vietnam standing out as possibly the most vulnerable, with shares of exports to the EU as high as 6 to 7 per cent of GDP.”

While the UK ranks 22nd in terms of the economies that Singapore exports to, the EU is among the largest, noted UOB economist Francis Tan. “In the longer term, the EU will be impacted too and that will impact our exports as EU28 is one of our largest exporting economies,” he said. “I do see that if Brexit happens and spills over to other EU economies, that will dent global investment confidence. Then, we should be concerned on our total exports to the world, and not just exports to the UK.”

Singapore companies such as transport operator ComfortDelGro as well as property firms City Developments and Ho Bee are among those exposed to the UK market, but a Brexit impact is likely to be contained, said analysts. UOB KayHian analysts said weaker British economic growth could hurt ComfortDelGro’s taxi and bus revenue, although it noted that the bus segment is likely to be resilient. Currency hedging would mitigate the impact of pound weakness, they added.

“I am more concerned about the UK companies based in Singapore, as their costs will suddenly be much higher. That may result in several cost-cutting exercises and less spillovers (in terms of contract jobs) for our local firms,” said Mr Tan.

According to the British Chamber of Commerce in Singapore, there are about 260 companies in Singapore with UK origin, but this number may be an underestimate. The biggest British companies here include Rolls Royce, Shell, BP and Barclays Bank.