In a little over a month, on June 23 to be exact, the UK goes to the polls to decide on whether or not it should remain in the EU. The outcome is very uncertain with opinion polls hovering around the 50/50 mark. What is also uncertain is what would the UK’s relationship be with the EU, should it decide to leave.
It is generally agreed that this would take a long time to negotiate, because there is no precedent or ‘blueprint’ to follow. So there is a lot of uncertainty about and, if there is Brexit, this would continue for quite a while. Many commentators are calling for corporates to be prepared to cope with the possibility of Brexit but these general exhortations are short on specifics. What exactly should business, and treasurers, be doing?
If Brexit happens, it will have big implications for the UK, many of which are currently unclear. There will be implications for where businesses locate, where treasury activity is conducted, taxation, trade, employees and regulatory, to mention just a few. In general, my view would be that international businesses that are currently within the EU, for example a US, Japanese or South African corporate, would prefer to remain within the EU should the UK exit. That would suggest the gravitational pull of the EU and some movement away from the UK.
Even if you accept this line of argument, it is difficult to plan concrete actions at this stage and it makes sense to await the outcome and the resulting negotiations, before investing too much time in contingency planning. There are just too many ‘ifs’ and ‘buts’ for this to be productive.
From a treasurer’s perspective, the most obvious thing to address is exposure to Sterling FX risk. Sterling has already reacted to the Brexit possibility (GBP minus 10% v EUR since mid 2015), and will continue to react to what the polls are indicating. If the polls remain 50/50, that uncertainty is likely to weigh on Sterling. Once the polls close on the 23rd, expect a further significant move if the result is a surprise. However, overall, I find it hard to comprehend how Brexit could strengthen Sterling in the short to medium term. And in the longer term, no one actually knows at this point.
Now that the local elections are out of the way in the UK, the real referendum campaign is getting started. The core issues have yet to come to the surface and in particular, the business and economic issues have still to be crystallised. More than likely, the harder financial considerations will tilt the argument in favour of ‘remain’. However, referendums are uncertain and something like voter turnout, or a wet day, can impact the result.
Treasurers, manage your Sterling risk!