Brexit: Less impact to Malaysian traders in short term

Prof. Dr. Asan Ali Golam Hassan/ University of Technology, Malaysia

The Brexit or the British exit from the European Union (EU) in a historic referendum on 23 June 2016 has affected the money market (shares, bonds, debentures, derivatives) goods and services, property market/assets and labour market.

The market shocks in the United Kingdom (UK) begin in the money market and it is very much influenced by risks, sentiments and perceptions. In the short term, consumers will sell their shares in the money market because they do not want to bear the risks (not sure of what is going to happen) after UK withdrew from EU. The effect is more pound supply in the market and this will cause the currency’s value to drop.

When the value of pound drops, it will have an impact on the asset market. The returns of investments and rents from property sectors are expected to drop. In the short term, entrepreneurs/industry in the money market will choose to transfer their operational offices to other EU countries and when the entrepreneurs reduce their operations, the rate of unemployment is expected to rise.

Nevertheless, in the long term, the bigger issue will arise that is the status of workers from EU countries who are still living in the UK, whether they are still working or searching for a job, and the need for visas and other regulations.

The necessity for visas and other regulations will incur extra costs to the operations and to the entrepreneurs and these may cause an increase in the prices of goods and services (impact to the cost of goods and services). At the same time if the pound drops, the value of imported goods will be more expensive, thus the rate of inflation is expected to rise in the UK.

Regarding the effects of the drop in the value of pound to the countries trading with UK, Professor Dr. Asan Ali Golam Hassan from the University of Technology Malaysia, International Business School (UTM-IBS) said, in the short term it will have an impact on the Malaysian investors in the UK especially in the money and the property sectors. Relatively their profits will be reduced (due to the drop in pound value) and operational costs will be increased due to the rise in the costs of labour, transfer of operations to other countries and input production costs if the inputs are imported.

Malaysian traders will get a positive effect from the drop in the pound value, due to the cheaper prices of goods imported from the UK. On the whole, it is expected not to give a big impact because the UK is not the key trading partner of Malaysia.

Many economists pre-empted that Britain’s economy would be down due to many foreign investors withdrawing their assets from that country and instead transfer it to other EU countries. On this matter, Prof. Dr. Asan Ali commented:

“The pre-emption has its truth to a certain extent because a country’s economy is very much dependent on service sectors (including money sectors). Around 44 percent of the UK, exports go to the EU countries.

“While waiting for the new terms which will be framed by the UK and the EU, companies will have to decide to move to another EU country to guarantee the stability of their operational costs besides they are used to the EU regulations and terms of trade,” he added.

The effects of Malaysians’ investments in hotels in London and also new investors in the UK, Prof. Dr. Asan Ali said,   the effects on the returns and profits of companies involved in such sectors would be reduced as the value of pound dropped.  The uncertainties in the new regulations would also affect the competencies of companies concerned in the near future.

Nevertheless, in the short term, Malaysian companies in the tourism and education sectors are expected to gain as more tourists and students will go to the UK following the drop in the pound value. The negative and positive effects will be very much lesser in the long term if the value of the pound increases.

Following Britain exiting from EU, many big shares in the Stock Markets drop in value and how could Britain stop this from happening? Prof. Dr. Asan Ali said the situation is based on perceptions and sentiments. The uncertainties in the markets and regulations, in a way, make new investors very doubtful on the prospects of UK’s future economy.

The Bank of England (the central bank) is expected to intervene to help stabilise the money market through various monetary policies that fit the situation. Besides that, the policy makers will formulate policies with more conducive terms and conditions to give more confidence to the foreign direct investors (FDI).

Meanwhile, trade negotiations with the EU are expected to start the soonest. According to Article 50 of the “Lisbon Treaty EU”, the UK has two years to negotiate after withdrawing from EU.

On the possibility of other members to exit from EU, he said, there is a possibility for other countries to follow Britain’s decision if they can get more comparative advantages for doing so.  Among other reasons why Britain exits from EU is the influx of foreign workers or immigrants to the country. This influx in a way closes job opportunities for younger generation and subsequently the cost of skilled and semi-skilled workers are expected to be rigid and increase gradually.

The European Union (EU) was formed in 1957 via Rome Agreement which later built the European Economic Community (EEC).  EU consists of 28 member countries. EU implemented a single market as EU since 1992 which enabled the free movement of goods, services, money and labour. This idea was to increase trade, create job opportunities and cheaper prices of goods.

In the EU, UK’s economy is the second biggest after Germany.  If EU is regarded as an economic block, it would be the second biggest economy in the world after the United States, based on the Gross Domestic Product (GDP). UK’s economy is the fifth biggest in the world after America, China, Japan and Germany.

EU contributes about 16.5 percent of the world economy (1980 around 30 percent). The biggest contributors to GDP in EU are Germany about 20 percent, followed by the UK 17 percent, France 14 percent, Italy 11 percent, and the remaining by other countries.

Apart from that, 44 percent exports of UK go to EU (before 2008 about 50 percent). UK became a member of the EU in 1973. On 23rd Jun 2016, through a referendum participated by 30 million voters, 52 percent agreed for UK to leave the EU.