It is June 24th and the UK electorate have voted in favour of Brexit. As the nation moves into unchartered waters and a new political era, fears abound as uncertainty takes hold. What will happen to the current account and budget deficits? Will there be a recession? Can we expect an interest rate cut? When will David Cameron resign?
Amongst the sea of unknown there will at least be one thing we can be certain of – sterling will be hit, and hard. The pound could quite easily end up being 15-20 per cent lower than current levels against the USD, with a similar decline in the short term against the euro entirely possible. Make no mistake, this would have significant ramifications for SMEs with international operations and/or aspirations.
Although movements in sterling of the magnitude described above are large, this need not be seen as an entirely bad thing. Specifically, this would be a boon for exporters with a 20 per cent cut in export prices potentially resulting in a demand increase across all industries. In fact, a sharp devaluation of the pound could be the perfect remedy for UK businesses struggling to export, particularly as an overvalued currency has impacted the price competitiveness of many in recent years.
However, one must remember that this outcome is based on the theory that transactional tariffs are not imposed as part of the new post-Brexit model – the net effect of a 20 per cent devaluation alongside a 20 per cent tariff will not help exporters in the slightest.
What can we expect exporting SMEs to do in a post-Brexit world in response to a plummeting pound? The more canny ones will use hedging products, such as forward contracts, to lock in beneficial multiple year rates – as long as three years in some instances. This could be a game-changer for some SMEs as previously untapped markets could open up as they become more viable options. In some instances, this could help facilitate significant growth for the most nimble businesses.
Whilst exporters may embrace this new world, importers will likely face a more difficult time. Put simply, importing goods and services from abroad would be drastically more expensive, so those with overseas supply chains would face difficulties. Importers without an existing currency strategy in place are likely to face the greatest FX headwinds – expect some sleepless nights in the run up to the referendum amongst the CFOs of these businesses, particularly if the Leave camp gain real momentum in the coming weeks.
One of the lesser discussed impacts of a Brexit has been the impact of a falling sterling on property prices. Should sterling tumble as much as envisaged, then UK property will be very appealing to foreign buyers. It is not beyond the realms of possibility that business hubs across the UK, particularly areas such as London and Manchester, will see international investors acquiring comparatively cheap commercial property. Any such move could be an impediment for UK businesses looking to grow their physical operations in the UK, as they become priced out by foreign buyers.
Considering all of the above factors, as well as a multitude which haven’t been mentioned, I think it is fair to say that the trading landscape of the UK’s internationally focused companies would be thrown into a new and rather uncertain dynamic by a vote for a Brexit. Critically, however, this is not to say that it will be all doom and gloom as there will be opportunities, particularly for exporters.
As the final rounds of political mudslinging unfold, it’s now a case of waiting to see what the UK decides. Roll on June 24th.
Jeremy Cook is the chief economist of World First.