Brexit - Getting on with the Neighbours
23rd June, St. John’s Eve, the traditional Midsummer celebration is traditionally celebrated in rural Ireland and across France and Europe through bonfires – St. John’s fire. It was a time for family and friends to get together to celebrate life.
23rd June 2016, the traditional bonfire turned into a kind of political volcanic explosion as the United Kingdom voted to exit the European Union.
As the momentous decision is digested in political and media circles here in Ireland and across all of Europe, there’s one thing for sure, it’s not generally good for business in Ireland. It’s new territory, the political and business implications are wide ranging and largely unknown and business leaders are exercised in figuring out and speculating when and how it impacts their business. On the political front, An Taoiseach Enda Kenny will seek to make Ireland a 'special case' in the Brexit negotiations whenever they start. Great Britain has the starting gun at the moment and it won’t be clear for a while when that goes off. In the meantime, we take a look at some of the considerations for our clients and the business community in general.
Exporters of goods and services to the UK
Irish exporters are immediately impacted. In the first instance sterling has weakened significantly against the euro, making their euro-priced goods more expensive and that will make it more difficult for exporters to compete with domestic UK providers. The uncertainty around how Britain manages its economy through and after exiting EU markets will also serve to sharply dampen demand for consumer goods and services.
Irish Business will focus on how to best manage the exchange risks through hedging and options for sterling. It is a good time to re-evaluate the UK market and adjust business plans for potentially falling demand and higher prices for their goods and services in the UK while looking to new markets to fill potential and likely gaps.
While the exit will take anything from 24 months to a number of years from the time that the UK officially informs the EU of its intention to exit, there is time to assess your business over the coming months and adapt to impending changes. Planning for change is critical and a full risk review should be carried out to identify opportunities and gain a better understanding of future trade relationships with the UK.
Importers of Goods and Services from the UK
There may be short term opportunities while importers of goods and services from the UK take advantage of cheaper Sterling. Make sure suppliers pass on benefits and don’t alter their pricing. Some of these advantages may disappear in time depending on the countries of origin for raw materials used in the UK production and distribution processes. After the exit is negotiated the impact of border taxes and duties if applied to UK goods and services will diminish these gains.
Impact on the National Economy
Amid all the uncertainty, there are 2 obvious factors which will have an immediate impact on the Irish economy: Firstly, the economic forecasts for the UK economy as a result of the vote to leave Europe suggest GDP in the UK will reduced. This means that the demand from our largest customer of our products and services will be likely to reduce, especially in our largest exporting industry to the UK - Agriculture.
Secondly, before the referendum result, Sterling was trading at 76p to €1. Now it is 83p. Analysts expect it could fall further. This makes our exports to UK more expensive for UK customers and will challenge the profitability of companies doing significant business there. The impact at home here in Ireland could hit jobs, ability to pay wage increases and consumer confidence. Careful cost management will be required to maintain competitiveness in the UK market for the foreseeable future.
Business Gearing and Lending
The attitude of the Banks is not yet clear but share prices in Banks have taken a big hit meaning that investors are expecting that Banking will not be as profitable and how they behave towards their Irish customers remains to be seen. Ability to repay debt could be impacted.
So if you have a significant trade with the UK and have bank debt, then you should be looking at the impact on profitability and banking covenants and conducting early discussions with your Bank where issues arise.
If you are undertaking refinancing or new debt make sure you carry out a rigorous analysis, sensitivity and volatility analysis as part of your project.
If you have UK exposure, look for some opportunities to perhaps fix exchange rates to achieve a certain level of certainty.
Ireland may be seen as offering FDI investment opportunities for global business currently operating or headquartered in the UK, who see this as a strategic imperative for them and look to relocate here. New FDI seeking to enter the Eurozone trade area may also see Ireland as a good place to locate. New opportunities may emerge and the benefits will spill over to the wider economy and offer new opportunities for business here.
Also, we need to avoid over-reaction and get the balance right as the dawning and implications of what has happened unfold over the coming months and what the new rules of engagement are.
Business with the UK is not going to disappear, it will still be there and there will be new challenges for both importers and exporters to re-structure strategy and operations and business models to adapt and make it a success. The resilience of Irish Business in doing this on the global stage has been remarkable over the decades.
Brexit has introduced a lot of speculation. It is breaking new ground with complex legal, political and business implications. No-one really knows what will happen. Be vigilant in monitoring events and especially the potential impact they may have on your business.
Russell Brennan Keane are here to help you consider and evaluate the impact on your business. Contact us for further information.