On Thursday 23rd June 2016, the UK public will vote on whether Britain will leave or remain in the European Union. There has been much speculation over what a British exit (Brexit) from the 28–member EU would look like. One thing is clear though, the uncertainty surrounding the debate has seen much volatility in exchange rates which recently saw the Pound plunge 1.4 % against the Dollar in a single day.
In a Censuswide survey of Financial Directors and key decision makers in medium and large UK firms that trade internationally, the findings reveal growing concerns amongst business leaders about exporting to the EU and general job uncertainty in the event of Brexit. The survey conducted by Fexco International Payments also revealed that nearly 64% of those surveyed admitted that their business had been adversely affected by the Brexit debate:
1.Profit margins and exchange rate volatility
It is hardly surprising that increased fluctuations in the currency market prevail in the build up to the referendum. In recent times, however, the level of volatility has been quite unprecedented and has created much concern for UK firms, especially those that trade internationally. Recent opinion polls also show a swing to the leave side, indicating a chance of Brexit and bringing with it, greater uncertainty in the market. Commenting on the impact David Lamb, Head of Dealing at Fexco Corporate Payments said;
“In the current climate of tight margins and unpredictable exchange rates, a sudden shift in the value of the Pound can make the difference between profit and loss on a cross-border business deal. Failure to fix an exchange rate can work in a company’s favour if it’s lucky, but with the stakes so high, it’s unwise to leave it to chance. Not doing so can leave an importer a hostage to fortune.”
It is very likely that large businesses will have been prepared for the higher levels of volatility in the run up to the referendum by using currency risk management strategies which will help in the short term. Others who may not have are now heavily exposed to greater currency movements and are witnessing the negative effects on their profit margins.
2. Overseas Trading
Many UK businesses that trade overseas have expressed concern about exporting in the event of a Brexit. According to the Censuswide survey, 45% of respondents feared that exporting to the EU would become more difficult if Britain was to leave the EU. Interestingly, businesses in the capital were increasingly likely to be concerned about the negative consequences of a UK withdrawal from the EU when compared to anywhere else in the UK. Of the London-based firms surveyed, 51% felt that exporting to the EU would become more difficult post-Brexit, double the proportion in North West and South West England (25% respectively).
Despite the prevailing uncertainty and concern, many exporters have seen a rise in demand for their goods due to the sharp fall in the Pound. Since the referendum was confirmed last February, 46% of firms surveyed reported an increase in overseas demand. Great for exporters, not so much for importers, as the cost of what they buy abroad rises.
Some suggest Britain re-focuses its exports on faster growing emerging economies outside of the EU. In A Blueprint for Britain: Openness not Isolation, Iain Mansfield suggests the UK should seek to forge free trade agreements with major trading nations. He argues that fewer regulations and increased trade with emerging economies would put Britain in a strong position economically outside of the EU. Others still worry that this will all be determined by Britain’s ability to negotiate trade deals and that bargaining power for trade agreements are greater within the EU.
3. Employment post-Brexit
Many medium to large firms are currently making plans about what to do in the event of a UK vote to leave the EU and according to the Censuswide survey, 16% said they are considering laying off staff in preparation for a Brexit. Business leaders and those in the remain camp argue that Britain’s membership of the EU attracts foreign firms keen to be part of a market of over 500 million consumers. Because of this, many heads of business are contemplating taking their companies out of the UK if Brexit becomes a reality. EU money that funds research and development boosts UK business and creates employment, they argue.
To counter argue this, in his paper The EU Jobs Myth, Ryan Bourne of the Institute of Economic Affairs argues that talk of UK jobs dependency on the EU is misleading and comments:
“Politicians who continue to claim that 3m jobs are linked to our EU membership should be publicly challenged over misuse of this assertion. Jobs are associated with trade, not membership of a political union, and there is little evidence to suggest that trade would substantially fall between British businesses and European consumers in the event the UK was outside the EU”.
Nobody knows for certain what the impact will be if the UK were to leave the EU. What is certain however is that exchange rate volatility reflected in severe dips in the Pound has affected many medium to large businesses in the run up to the referendum. Business leaders are nervous about the economy, reflected in attitudes to overseas trade and employment. June 23rd is fast approaching and it is only in the months and years ahead will we see the full impact of Britain’s exit, should voters opt to leave the EU.
Fexco International Payments provides transparent and efficient international and domestic payment solutions across multiple sectors including education, healthcare, government and retail. If your business trades in overseas markets you will need to reduce your exposure to unnecessary currency risks. Let our experienced FX dealers help you with a solution that will protect your bottom line.
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