EU Referendum: a new dawn for trade
July 20, 2016
The news of the UK’s vote to leave the EU caused volatility in the financial system immediately after the results of the vote were announced. The political and economic implications impacted markets, and led to the UK losing its AAA credit rating. Moody’s, S&P and Fitch now rate the UK at AA and on negative watch. Although the markets have rallied to a certain degree, there is likely to be continued volatility as the uncertainty caused by the vote is worked through.
Immediately following the result, spreads on Credit Default Swaps – an indicator for the risk of companies defaulting on their debt - widened sharply, particularly for non-investment grade companies. According to the Markit iTraxx Europe index, these spreads widened from 325bps to 400bps, a rise of 23%.
What does this mean for businesses trading both in and with the UK?
In the short term, we anticipate that this increased risk of default may begin to restrict the amount of credit available to businesses either from the banks, credit insurers or suppliers. As a result companies could find it harder, and more costly to borrow, and face tighter credit limits from their suppliers; the knock-on-effect being increasing restrictions on the ability of companies to trade, putting pressure on growth rates and profit margins.
What do businesses need to do now?
The immediate priority is to manage liquidity by taking actions to optimise working capital and manage costs. Refinancing may become more challenging if profitability falls, however, in our calls with banks since the referendum result they have stated categorically that they are open for business, for both existing and new borrowers, albeit with a greater focus on credit worthiness.
What happens next?
We anticipate that in response to increased economic and political risks in the UK and EU, demand for trade finance and credit insurance products will increase as businesses look to manage the increased risks of cross border trade for imports, exports and acquisitions.
In the long term, UK businesses could enter a new era of world trade as new markets open up for British goods and services, boosted by a lower pound and, if the UK Government successfully negotiates free trade agreements, tariff free entry.
This outturn would be a significant change for UK businesses, as currently almost 50% of UK exports go to the EU. However, the EU Commission itself forecasts that 90% of global demand will come from outside of the EU over the next 10-15 years. With new trade agreements, UK goods and services will be able to be sold more competitively in these new overseas markets.
In this scenario, trade finance and credit insurance will also play an important role in supporting businesses take advantage of the new trade corridors, facilitated by the agreements negotiated by the Government. Businesses will need support to finance the export of goods and services to new customers in new markets.
The uncertainty around the UK economy may last for several years. It will take time to understand the full implications – and opportunities – of the vote to leave. During this time businesses clearly will be keen to ensure they protect their profits and manage their liquidity.
The success of the UK’s economy will be heavily impacted by the ability of the Government to negotiate free trade agreements. Businesses need a trade friendly political landscape, and for banks, export credit agencies and credit insurers to provide the trade finance support to enable them to seize new opportunities in world markets. In the short term, these products will also help businesses to manage liquidity and work through the period of uncertainty.
Have you started to think about how you could manage liquidity? If you would like to explore the options, including the use of trade finance, get in touch to discuss your situation in confidence.