The newest SPEEDA INSIGHTS thematic report.

1. 01
Impact of Brexit on ASEAN/Asia
Janany Vamadeva
Brexit and Asia: No real concerns as such
The key downside risk identified by various policy institutions and governments,
in particular the IMF, remains Brexit, the fate of which will be determined on
June 23 when the UK holds the referendum on whether it should leave or
remain in the EU. As of now, it is hard to assure a certain outcome, given the
outcome of recent survey polls, which suggest that people are divided.
Obviously, leaving the EU would likely have serious implications for the UK ─ the
worst positioned in this scenario. The main stumbling block here is the future of
the relationship between the UK and the EU. Heightened uncertainty and a lack
of clarity over how the relationship would be re-established with the EU, is the
one reason that the transition process appears to be a painful and protracted
one.
The impact of Brexit could be measured in terms of i) trade relationships, ii)
foreign trade investment, iii) regulation, iv) competition, v) immigration, vi)
financial services and vii) trade policy. When we assess the impact of Brexit
based on these key economic parameters, we can conclude that the UK and
some of the EU countries, namely the Netherlands, Ireland, Cyprus, Portugal
and Greece, are the most affected by Brexit, given the closer ties within the
economic union.
Outside the EU, the direct implications remain limited due to the relatively low
significance of trade and other relationships. That being said, the mere
uncertainty and dent on sentiment would pose downside risks to the broader
global economy.
Impact of Brexit on ASEAN/Asia
20160531

2. 02
Impact of Brexit on ASEAN/Asia
In the context of ASEAN/Asia, the overall impact of Brexit, in our view, remains
limited as both the EU and the UK are considered to be attractive markets from
the perspective of these economies. So what that implies for Brexit is that it
won’t be business as usual even though the negative impact is unlikely to be
material. Brexit could potentially change the business rationale for basing their
operations in some of the EU countries, and as such affecting valuations of
these businesses. Moreover, it would indeed impact the way business is done
with EU and the UK on the regulatory, FTA and political fronts.
We identify five sources of impact on Asia/ASEAN stemming from Brexit: i)
Financial services remains the most affected by Brexit, with exposure in terms
of real assets, bond/equity holdings in the UK in their investment portfolio and
currency risks. ii) FMCG companies have to reassess their business model
enabling them to look at the UK as a separate market rather than part of the EU.
iii) Property investors who are heavily invested in commercial and residential
properties in the UK are likely to suffer losses if demand for office headquarters
decline and the residential market is affected by strict immigration rules. iv) The
transitional phase after Brexit would lead to a prolonged period of political and
economic uncertainty in the EU countries, which will in turn affect the Asian
countries/companies/investors that have relationships with these EU countries.
v) Finally, on the positive side, with a change in equation of the trading and
other relationships with the EU countries, Asian countries may be able to
capitalize on the gaps created by Brexit.

3. 03
Impact of Brexit on ASEAN/Asia
Summary of Impact on Asian Countries from Brexit – Minimal
In sum, the impact of Brexit has far reaching implications on the UK and the EU
countries rather than outside the economic zone. The UK’s importance in trade
to the Asian countries is quite low at less than 1% of GDP. However, given the
fragile nature of the recovery of global growth, any uncertainty is just going to
add to the global woes and further prolong the recovery period, including for
Asia. Further, Brexit could have serious repercussions for property and capital
market investors due to the negative impact on financial markets, currency and
asset valuations in the UK. These risks, though not significant, appear to be
higher than the trading related risks. To the contrary, Asia could also benefit
from an exodus of financial business from London if the UK votes to leave the
EU, with Singapore and Hong Kong seen as strong candidates given their already
robust infrastructure and skill set.

4. 04
Impact of Brexit on ASEAN/Asia
A Quick Look at Brexit: What Happens After a “No-vote”?
If the UK votes to leave the EU, the key question that cannot be answered is
what access Britain will have to the EU market, regulatory regime and migration
rules or how long any of these conditions may take to negotiate. Hence, the
underlying issue is the uncertainty surrounding the relationship between Britain
and the EU, post Brexit.
○ The first and foremost to react should be the financial markets ─ not just
the UK or European but the global markets ─ as any sort of uncertainty
derails the recovery, given the fragile nature of the recovery so far. Even
though the markets are pricing in the uncertainty, a no-vote will almost
certainly dampen investor confidence across the globe.
○ GBP may lose its value following the heightened uncertainty in the local
and global markets, despite the depreciation of GBP since the Brexit topic
came to the limelight.
○ Even though we mention the financial/currency markets as the first to
react, political uncertainty is the critical problem. We simply do not know
what sort of an agreement the UK government will be able to seal with the
EU and how long it will take. Most economic think tanks estimate a
transition period of at least 10 years, which does not bode well for the UK
and the EU.
○ For the EU, we can expect the same level of uncertainty given that the UK
remains a powerful member.
○ The IMF expects the long-run effects on UK output and income to be
negative and substantial underpinning increased barriers, which likely
would reduce trade, investment and productivity. There is a wide disparity
among economists about the negative impact of Brexit on UK’s GDP
growth starting from -1.5% to -9.5% of GDP. This itself emphasises the
underlining issue of uncertainty about the relationships with the EU and
the rest of the world post the Brexit.
Potential models being discussed post Brexit
1. Norwegian ─ based on membership of the European Economic Area, where
the UK will have full access to the single market and free labour movement
but no say in regulation
2. Swiss ─ based on bilateral accords which narrows down the above option
to selected sectors
3. Canadian ─ based on FTA, which introduces non-tariff barriers and
regulatory divergence
Regardless of the model adapted by the UK, we can see that the UK will not
have the same favourable terms of trade under its EU membership, whilst
increasing the downside risks to economic growth.

5. 05
Impact of Brexit on ASEAN/Asia
Exposure via Exports: Minimal for Asia
The main tangible impact comes in the form of trading relationships due to
reduced growth in the UK post Brexit and some EU countries with sizable
exposure to the UK. In order to gauge the impact on Asian countries, we
compare the exports to the UK from these countries with their GDP. Our
analysis reveals that there is actually minimal impact on trading revenues
stemming from Brexit. Hong Kong has the highest exposure at 0.26% of GDP
based on 2015 data.
We present below a matrix that helps identify the risks for Asian countries
stemming from Brexit based on exports, FDI stock, workforce and bank links.
Matrix of impact of Brexit on Asian countries
Exports to UK as % GDP
FY 2015
FDI stock in the UK as % GDP
FY 2014
Workforce in UK
as % population
Bank links as % GDP
FY 2015
ASEAN
Thailand 0.08% n/a n/a
Malaysia 0.08% n/a n/a
Singapore 0.08% 4.3% n/a n/a
Philippines 0.02% n/a n/a
Indonesia 0.02% n/a n/a
Brunei 0.00% n/a n/a
Vietnam n/a n/a n/a
Myanmar n/a n/a n/a
Cambodia n/a n/a n/a
Laos n/a n/a n/a
Hong Kong 0.26% 6.0% n/a n/a
China 0.04% 0.0% n/a n/a
South Korea 0.03% 0.3% n/a n/a
India 0.03% 0.2% 1.4% n/a
Japan 0.02% 1.2% n/a 0.01%
Source: ONS, IMF, Labour Force Survey, Bank of England

6. 06
Impact of Brexit on ASEAN/Asia
We also present the same for the EU countries for comparison purposes. Of the
EU countries, we identify Belgium, Cyprus, Ireland, Malta and Netherlands as
the worst positioned due to their dependence on the UK. Following on from this,
we need to be wary of the exposure of Asian countries to these EU countries
that have been flagged as risky in the below matrix. However, we can
comfortably conclude that the exposure to these countries remain negligible,
alleviating any concerns, based on recent available data. Total exports from
ASEAN to the EU have risen from EUR 70bn (USD 76bn) in 2004 to EUR 100bn
(USD 109bn) in 2014.
Matrix of impact of Brexit on EU countries
Exports to UK as % GDP
FY 2013
FDI stock in the UK as %
GDP
FY 2013
Residents in UK as %
population
UK Bank links as % GDP
FY 2013
Ireland 11.8% 7.5% 7.1% 174.0%
Malta 7.8% 11.8% 67.0%
Netherlands 7.6% 27.6% 0.4% 63.0%
Cyprus 7.1% 23.0% 4.0% 77.0%
Belgium 6.8% 4.9% 0.1% 21.0%
Luxembourg 4.1% 142.1% 365.0%
Czech 3.9% 0.0% 0.4% 3.0%
Hungary 3.7% 0.4% 0.7% 4.0%
Latvia 3.6% 0.0% 4.4% 3.0%
Lithunia 3.4% 0.0% 5.3% 1.0%
Denmark 3.2% 1.9% 0.4% 12.0%
Slovakia 3.2% 0.0% 1.0% 2.0%
Germany 2.8% 2.4% 0.2% 19.0%
Poland 2.8% 0.1% 1.9% 4.0%
Portugal 2.6% 0.3% 1.3% 21.0%
Spain 2.5% 6.0% 0.2% 8.0%
Sweden 2.5% 2.2% 0.4% 14.0%
France 2.0% 4.3% 0.2% 25.0%
Bulgaria 1.9% 0.0% 0.7% 8.0%
Finland 1.8% 0.8% 16.0%
Greece 1.7% 0.3% 0.4% 24.0%
Estonia 1.5% 0.0% 1.0%

7. 07
Impact of Brexit on ASEAN/Asia
Romania 1.5% 0.0% 0.6% 2.0%
Italy 1.4% 0.6% 0.2% 10.0%
Austria 1.3% 0.8% 0.2% 6.0%
Croatia 1.2% 0.0% 6.0%
Slovenia 1.2% 0.0% 2.0%
Source: ONS, Bank of England, IMF, European Commission
On the positive side, if the UK decides to leave the EU, Britain most likely would
focus on the ASEAN countries to sign trade deals to make up for the loss
stemming from disruption in the EU relationship. This could increase trade with
the UK for ASEAN countries. However, we think it is better to leave the blue sky
scenarios out at this juncture, given no one knows what the post Brexit UK
relationship with the rest of the world is going to look like.
Exposure via FDI: Singapore has the Highest Exposure
Among ASEAN Countries, Though Hong Kong the Most
Exposed in Asia
As shown in Exhibit 1, Singapore has the highest exposure to FDI stock in the UK
at 4.3% of GDP among the ASEAN countries. However, when we look at Asia,
Hong Kong tops the list with 6.0% followed by Japan at 1.2%. Even though the
exposure in terms of FDI is higher than the export exposure discussed above,
we do not see any reason for concern but rather, some transitional challenges.
Some of these operations may have to be relocated to a EU country, having
some interim impact on earnings. Nonetheless, the magnitude of loss is quite
significant for the UK rather than the countries that are considering relocation.
Singaporean companies in Britain are largely service firms that typically do not
rely on their presence there to service their European operations, according to
the Singapore Business FederationCEO. It is estimated that circa 55% of
Singapore’s investment in the EU is in the UK and concentrated in the property,
transport and tourism sectors.
In absolute terms, Japan is the most exposed with investments totaling GBP
38bn at the end of FY 2014 ─ equating to 1.2% of Japanese GDP, mainly in the
car industry which accounts for 1,000 Japanese companies and a workforce of
140,000 people (0.1% of Japan’s population).

8. 08
Impact of Brexit on ASEAN/Asia
However, the countries may decide to continue to be based out of the UK
rather than move to a EU country, similar to Toyota which has already
announced that it would stay given the magnitude of the investment. So the
implications are not serious given the UK has its own currency unlike Greece as
Grexit would have resulted in a vacuum until a new currency is created.
Exposure via Workforce and Banking Presence: A Non-issue
The EU remains the key migrant workforce in the UK with Africa, Australia, the
USA and New Zealand making up the higher shares in the non-EU category.
Data is only available for India, Pakistan and Bangladesh separately implying
that most of the Asian countries have a negligible workforce presence in the UK
and as such minimal disruption.
Another source of risk is banking presence and the available dataset only
provides a breakdown of Japanese exposure among the Asian countries. Against
the backdrop of unavailability of separate data, we believe that banking
assets/liabilities of the other countries remain limited. Even the Japanese
exposure, as measured by liabilities, remains small at 1.4% of GDP.
Exposure via Debt/Equity Holding: Loss in Currency Value
Could Lead to Losses in Capital Markets
If Brexit happens, GBP-denominated investments would become more volatile
as investors assess the effect on the currency. Already, the GBP has been quite
volatile since the Brexit topic emerged and the currency has been depreciating
since the start of this year as uncertainty increases as we get close to the
election day. Along the same lines, the UK stock market has been erratic. What
this implies for other countries is that they are likely to incur losses on capital
market investments ─ debt and equity.
Based on FY 2014 data available, the rest of the world represents 53.8% of
share ownership in the UK equity markets, amounting to GBP 928.6bn. In the
absence of the detailed geographical breakdown, we would assume that USA
and Europe would make up a bigger share compared with Asia. However, Asian
investors holding equity/debt positions are likely to face the double whammy of
currency losses and a market decline.
In the gilt market, we estimate that about 27% of the debt is held by foreign
investors with central banks of foreign countries only representing 5% of total
gilts. However, we see some risks from the financial markets to Asian investors.

9. 09
Impact of Brexit on ASEAN/Asia
Further, Brexit could have ripple effects in Asia by cutting off the UK's Asian
finance investors from the EU financial market. Asian fund managers working
out of the London base may no longer be able to distribute funds across Europe.
However, having its own currency alleviates the major concern relative to a
Grexit. For Brexit, it is more about the uncertainties about the trade relationship
and the consequent impact on growth and currency rather than creation of a
currency.
Source: ONS, IMF, Labour Force Survey, Bank of England
Exposure via Property: 10-18% Hit on House Prices Expected
by the Chancellor
The Chancellor for the first time has estimated that UK property prices would
be hurt in the region of 10-18% if the UK votes to leave the EU. Brexit could
entail sharp drops in equity and house prices, increased borrowing costs for
households and businesses, and even a sudden stop of investment inflows into
key sectors such as commercial real estate and finance. Such concerns may
have already begun to affect UK markets in recent months. In the commercial
real estate market, transactions plunged about 40% in Q1 2016A. Although the
residential real estate market remains buoyant, this may reflect temporary
effects due to tax changes. In financial markets, GBP has depreciated by 9% in
trade-weighted terms since November, the cost of insuring against a UK
sovereign default has doubled (albeit from a low level), and the cost of insuring
against exchange rate volatility around the time of the referendum has spiked.
12% 13% 13%
16% 16%
28%
31%
33%
36% 36% 36% 36% 36%
40% 42%
43%
54% 54%
0%
10%
20%
30%
40%
50%
60%
1990 1991 1992 1993 1994 1997 1998 1999 2000 2001 2002 2003 2004 2006 2008 2010 2012 2014
Shareholding % of foreign investors in the UK

10. 10
Impact of Brexit on ASEAN/Asia
Asian residential property investors represented just 6% of those buyers in
areas such as Kensington, Chelsea and Belgravia in Q1 2015A as opposed to
26% in Q1 2014A. Chinese buyers declined to 3% from 9% during the same
period. We can see that interest in London property is waning among Asian
investors. According to data from Knight Frank, Hong Kong-based buyers
accounted for 3.3% of purchases of prime London homes in H1 2015A, down
from 5.6% in the previous corresponding period. Singapore investors made up
1.4% compared with 3.8%, while Malaysian purchasers declined to 0.6% from
0.9%. Chinese homebuyers accounted for 9.4%, down from 10%.
Even though the share has declined, the property investors will experience
losses due to a hit on house prices and currency depreciation.
Are There any Positive Implications for Asia from Brexit?
In the scheme of things, however, Brexit would mean that a major powerful
world economy is seeking to re-establish its trade partnerships – something
that could actually benefit ASEAN and the rest of Asia. Asian countries that are
currently involved in prolonged free trade talks in Brussels may be able to seal
deals quite quickly with the UK.
Another interesting pointer would be the relocation of financial services and
other companies to Asian countries like Singapore and Hong Kong, which
already have the required robust infrastructure.

11. 11
Impact of Brexit on ASEAN/Asia
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