Professional Documents
Culture Documents
ahead
UK-ASEAN business
after Brexit
September 2016
1
Contents
Page
The UKs current position in Europe 3
Hard Brexit or soft Brexit? 4
Euro Crisis? How events in Europe 5
might impact Brexit
What happened on 23 June? 7
The economic impact: A new dawn 8
breaks
Article 50: How the UKs exit 9
mechanism works
The UK-ASEAN opportunity 12
Investing in UK Plc 15
Tax: The impact on foreign 16
companies
Financial services: City will endure 17
but Europe risks losing out
Real Estate: A welcome market 19
correction
Infrastructure: Slower pipeline but 20
that may help
Leisure and hospitality: Buoyed 22
by tourist dollars
Airlines: Looking for a safe landing 23
Energy and commodities trading 24
Conclusion 25
2
Foreword
Georgia
Bosnia Herzegovina Moldova
Azerbaijan Montenegro
Macedonia
Armenia
Russia
Albania
Croatia
Bulgaria
Euro Zone
Cyprus EU Customs
Union
Romania
Ireland
European Free San Marino
Trade Association
Austria Belgium United
Finland Kingdom
Iceland France
Andorra
Greece
Italy
Luxembourg Estonia
Liechtenstein
Czech Rep.
Germany
Netherlands Turkey
Slovakia
Norway Lithuania
Switzerland Malta Denmark
Portugal
Latvia Monaco
Hungary
Slovenia
Sweden
4
'Brexit means Brexit' has secretary of state for exiting the EU, this theory, they need to show that
backed that up by telling parliament it leaving the EU hurts to make Brexit as
become the clich of the was 'very improbable' the UK would painful as possible to halt anti-EU
summer. But the pledge remain in the Single Market. However, sentiment at home and to stop other
Theresa May made on the day the prime minister has appeared to countries too. Countries in the northern
soften her stance in recent days and bloc, which include Germany, broadly
she became prime minister distanced herself from Mr Davis prioritise continued free trade and may
now raises more questions comments. be tempted to take a softer line with the
than it answers. What is clearer is the prime ministers UK to support exports. Lastly, the
determination not to be forced to adopt a Visegrad will seek to protect their
Beyond taking the UK out of the citizens in the UK. Poland for example
cookie cutter model based on a previous
European Union, what does Brexit might prioritise the rights of its estimated
agreement between Norway, Canada or
actually mean? What kind of relationship 790,000 of citizens living in the UK.
Switzerland and Brussels. 'The model we
does Britain want with the soon-to-be 27-
are seeking is one unique to the United
member EU, and what are the chances it Power plays
Kingdom and not an off-the-shelf
will get its wish? Ultimately, the settlement between the
solution,' Mrs Mays spokeswoman said.
If the UK could wave a magic wand, it UK and EU will depend not just on the
would probably ask for something like alignment of interests, but who holds
this: Norways access to the Single most power and who needs a deal most.
Market, Switzerlands flexibility on Remaining For instance, the EU-27 and UK are each
regulations, Icelands control of its members are others most important trading partners.
borders and Turkeys membership fee. Proportionately however, while the UK
Unfortunately, even the most ardent
splitting and relies on the EU to buy almost half its
Brexiteer would concede that is nigh on coalescing into goods exports, only 16% of the goods
impossible. That in turn means the rival groups the EU exports are bound for Britain.
government has some difficult trade-offs One-nil to the EU.
to make. On the other hand, the UK is slated to
In fact, the question of what Brexit This appears to be part of an effort to pay 47.5 billion into the EU budget from
model to pursue is perhaps the most change the language around Brexit and 2016-2020. That would leave a major
difficult any British prime minister has move away from the idea that the funding hole that remaining EU states
had to answer since the Second World eventual deal must involve some trade- might want help filling. The EU may also
War. Does the UK maintain something off between free movement and access be very keen to do a deal. As political risk
similar to the status quo the so-called to the Single Market(a). consultancy Eurasia Group explains on
soft Brexit route and maintain close page 6, the EU faces serious challenges
trading relations with its near neighbours, One versus 27 in the coming years linked to the
as Norway and Switzerland have done? If predicting the UKs negotiating position Eurozone, immigration and other thorny
Or does it effectively tear up the post- months or even years from now is issues. It may be some time before we
1973 settlement and seek a hard Brexit difficult, guessing Europes negotiating get anything more than vague outlines of
that would cost it access to the worlds position will be harder still. The UK does negotiating positions on either side.
biggest economic bloc but see it gain not face a monolithic bloc. Based on
greater control over immigration, analysis of European media and the
economic strategy and its trading public statements and meeting
relationships? schedules of European politicians, we
believe the unions 27 remaining It could be some
members are splitting and coalescing
Not Norway. Not Canada
into rival groups: the northern Europeans,
time before we
Which way the UK goes is still up for an enlarged Visegrad Group to the east; get any more
grabs it seems. In a statement after the and a Mediterranean alliance, led by than the vague
cabinets first post-summer meeting, the France.
PMs spokeswoman echoed a key outlines of any
Leave demand by saying the new The Mediterranean groups principle aim deal
relationship with the EU 'must mean seems to be preventing the contagion
controls on the numbers of people who and disintegration of the Eurozone and
come to Britain'. David Davis, the new the wider European Union. According to
Note: (a) http://www.bbc.co.uk/news/uk-politics-37270060
5
Euro crisis?
How events across the Channel might affect Brexit
1. Baseline scenario
No more exits; shallow integration (60%
probability)
In the run-up to French and German elections in 2017, and to a
Federico Santi lesser extent afterwards, the EU27 take limited steps towards
Europe Analyst, Eurasia Group closer economic and political integration. Despite structural
problems in the Eurozone, which get in the way of its ability to
respond to economic crises, the integrity of the EU is
The eventual shape of the exit deal Britain signs with sustainable unless it suffers severe economic or political shocks.
the European Union will depend as much on the Eurosceptic parties hold on to recent gains, but it is unlikely
dynamics within the EU27 as any decision taken in they make a major breakthrough that leads to further exits.
London. That makes the course of political and Brexit ensures EU referenda get more attention in several
economic events on the Continent vital in countries. But the likelihood of any actually taking place is low
only in a handful of countries, notably the Netherlands, is a
forecasting the outcome of negotiations.
UK-style referendum a remote prospect. Add to that stronger
Here political risk consultancy Eurasia Group set out possible opposition, the very different contexts in those countries and
trajectories for the EU in the next two to three years and the higher price of leaving (particularly for Eurozone countries),
the probability they ascribe to each scenario before setting and the likelihood of another successful exit bid lower still.
out what that could mean for the UK.
Brexit implications
Scenario and impact summary
In this scenario, EU leaders want to avoid making a positive
3. Upside scenario 1. Baseline scenario example out of Brexit. However, they balance this against the
(10% probability) (60% probability) damage a messy separation or no deal at all would do to trade
EU and especially The EU does not and investment. This is particularly the case in states that are
Eurozone states fragment further, but still economically fragile after the financial crisis.
respond to Brexit by is left vulnerable to
integrating more the economic crises. An agreement based on the European Free Trade Association
closely. Eurozone countries (EFTA), giving the UK more or less unfettered access to the
Brexit impact: EU are particularly Single Market, would look a lot like full EU membership. The
leaders, free from the exposed. UK would have to contribute to the EU budget and accept free
threat of further exits, Brexit impact: The movement and the primacy of EU law. This is not politically
are more likely to UK can expect an feasible for either side, but especially in the UK given likely
make concessions agreement that opposition from Brexit campaigners and would be vulnerable
to the UK in mostly preserves its to rejection in any referendum on joining EFTA. The EU-UK
negotiations. access to the single agreement is more likely to be an ad hoc, comprehensive free
10% market but does not
trade agreement that also covers services. The extent to
give it total control
over EU migration. which Britains dominant services sector had access to the
Single Market will be a one of the main issues in negotiations
30% and will have a significant impact on the UKs long-term
60% economic future.
Even the most extensive free trade agreements do not
typically give access to services markets, but public support
for the agreement in the UK will be contingent on it granting
2. Downside scenario (30% probability) greater control over immigration. This trade off is likely to
dominate the negotiations: the more control over immigration,
Several states leave the euro.
the less access UK firms get to the EU services market.
Brexit impact: EU leaders take a harder line in Brexit
negotiations, causing greater disruption to trade and Timing is critical. Negotiating a free trade agreement in the
investment in the UK. Some kind of deal is reached, two years set by Article 50 is a huge challenge, on top of
however, and the UK is not forced to fall back on existing which exit negotiations have to happen simultaneously.
World Trade Organisation agreements. Extending the time is equally tough because it requires
approval by all EU parliaments. Some kind of bridge agreement
is likely to be needed to allow the UK continued access to the
Single Market until negotiations are concluded, but getting one
is not a given.
6
Leave Remain
51.9% 48.1%
17,410,742 votes 16,141,241 votes
http://www.electoralcommission.org.uk/find-information-by-subject/elections-and-referendums/upcoming-elections-and-referendums/eu-referendum/electorate-and-count-information
8
2
is somewhat akin to the performance of the UK
1 economy in the early 1990s.
0
Our second stress scenario sees an even
-1
sharper contraction in investment and a more
-2 acute retrenchment by consumers. Export
-3 performance disappoints despite the weaker
2015 2016 2017
pound, although imports are also curtailed thanks
Consumer spending Investment GDP to softer domestic demand. A significantly weaker
Source: ONS, KPMG. economy puts further pressure on government
revenue, leaving it with little room for additional
Consumer spending may also falter, while exports should
spending to boost the economy. The worsening
benefit from the lower pound and add some momentum to
environment sees the economy grow by only
growth. Overall, this could see UK GDP growth easing to
0.8% in 2016, before contracting by 4.8% in 2017.
1.7% in 2016, before a further decline to 0.8% in 2017.
This stress scenario represents a much more
The pound is expected to remain low and volatile in the significant setback to the economy, with overall
short term, perhaps falling even further than the sharp economic performance broadly akin to that
decline weve already seen since the referendum results, experienced in the Great Recession of 2008-9.
causing a significant rise in inflation in coming months.
9
10 Oct 2016
UK Parliament returns
4 Dec 2016
Re-run of disputed Austrian 23 Nov 2016
presidential election UK Autumn Statement
July-Dec 2017
UK EU due to
27 Aug-Oct 2017 hold presidency
German federal elections
3 Jan 2018
Implementation of
Europes MIFID II
2018
financial regulation
25 May 2018
Implementation of EUs data
privacy regulation (GDPR)
Investing in UK Plc
Over the past few years, the number of takeovers of publicly-
listed firms has steadily risen, and though domestic deals and
purchases from North America predominate, in recent years
Japanese buyers have moved in. The 24 billion takeover of
ARM Holdings Plc by Japans Softbank was a highly significant
Maggie Brereton transaction just after the Brexit vote.
Partner, Deal Advisory, So how difficult is it to take over a UK plc? All are subject to
KPMG in the UK the 'Takeover Code' and regulated by the UK Takeover Panel,
and that code has changed significantly, and in my opinion, got
tougher in the past five years. Companies need to pay extra
attention to what they do in the lead-up to deal. The panels
has also extended its remit to oversight of the post-deal space.
With the fall in the value of sterling and decreasing For example, the panel now have the power to make sure a
company valuations post Brexit, many are company has to honour any undertaking it makes before a
expecting UK plc to become targets for overseas deal, about life afterwards such as not closing a factory or
buyers. laying off staff. So what companies say in the run-up to an
offer is particularly important.
Strong British companies now trade at significantly lower
valuations, even though the fundamental qualities that make It can feel like the rules are onerous at first glance, but at their
that company and its products attractive to consumers, like heart their central objective is to make sure all shareholders
strong brands or unique technology, have not changed. are treated fairly in takeover bids. Tough rules also provide a
competitive advantage for some by discouraging others that
Companies on the FTSE350 index with a mostly UK-focused might not have readily-available funds for example.
business have suffered particularly. The opportunity for
overseas buyers is clear, however converting that opportunity The underlying fundamentals for British companies remain in
is not always straightforward. The UK takeover process is place. We expect to see many more approaches for UK plcs in
unique and bidders need to be well prepared and aware of the the coming months as suitors capitalise on lower share prices
complexities in the rules. and sterlings weakness.
60.00%
20.00%
0.00%
-20.00% <=25%
Less than 25% of revenues derived from UK
25% - 75%
Between 25%-75% from the UK
>=75%
More than 75% from the UK Domestically focused companies
-40.00%
16
However, on paper one of the big draws of Brexit for the UK The new chancellor, Philip Hammond may have scrapped his
might be its ability to negotiate free trade agreements with predecessor's plans to cut the corporation tax rate to show
other groups on potentially more favourable terms than it Britain is 'open for business', but by 2020 it will still have the
might get as part of the EU. That might include arrangements lowest rate in the G20 at 17%.
with the Commonwealth (of which Singapore, Malaysia and
In light of Brexit many investors will understandably wish to
Brunei are members) as well as ASEAN.
assess the tax impact of continuing to use a UK holding
It is unlikely the UK would change significantly the customs company structure. However, overall, we would expect most
duties on imports from outside the EU. Nor would we expect would conclude that Brexit would have little or no impact on
to see the UK introduce substantial duties on imports from the their group corporate tax position. In most cases, the UKs
EU. However, its still not clear what terms the EU or the rest bilateral tax treaties with individual member states mimic
of the world would be willing to offer UK businesses. That will favourable arrangements within the EU.
in part depend on how quickly new trade agreements can be
Brexit may therefore offer the UK an opportunity to introduce
negotiated with the UKs major trade partners. Given the
(or reintroduce) tax measures that EU rules bar them from
expected growth of ASEAN over the next few years, it is
adopting. For example, the European Court of Justice of the
reasonable to expect negotiations over a free trade agreement
EU has become increasingly proactive in curtailing member
with ASEAN will be high on the UK Governments agenda.
state laws where it perceives them to discriminate or be akin
VAT to state aid. Recent outcomes of the Commissions enquiries
into multinationals tax arrangements are an example of this.
Brexit will restore the UKs right to alter its VAT after four
decades of harmonisation inside the EU. That gives the UK That said, if the UK diverged substantially from the EU system,
Government the option to radically overhaul the rules. In that might make it less attractive to inward investors and
practice its unlikely to change much. VAT contributes a reduce its leverage in negotiations with the EU. We dont see
big changes in the short to medium term after a Brexit.
17
Giles Adams So even if logic dictates the continuation of a free and open
system with London at its centre, companies need to prepare
Partner, Regulatory Compliance, for the worst. That is why financial services institutions are
KPMG in the UK already making contingency plans based on the full gamut of
possibilities from negotiations. Banks and other players in the
sector are looking at their options and when they might need
to trigger those plans. That includes how they might need to
relocate some staff to Dublin, Paris and other EU cities rather
For almost three months, debate about the future of than wait for a deal to emerge.
Britains finance sector has centred on passporting
the question of whether banks in the UK can sell There is time at least two years however. Gaining the
services into Europe after Brexit. This is as much an necessary regulatory approvals in other jurisdictions is a
lengthy process and no institution should risk finding itself
issue for foreign banks using London as their
without a licence to trade.
European gateway as British institutions.
There may yet be a way that firms in the UK can sell into
So what would happen if the UK did lose its passporting Europe without the passport. Europes MIFID II regulations,
rights? And how would that loss affect the ASEAN region, its which take effect in January 2018 (before the UK is due to
banks and businesses? leave the EU), grant financial institutions outside the European
Right now, the message to Europes political leaders from the Economic Area the right to sell financial services inside it as
UKs finance sector and its customers across Europe seems to long as that countrys regulations are deemed as 'equivalent'
be unanimous: 'no change please'. The City of London is the to its own. As the UKs rules will be the same as the EUs
lynchpin in Europes financial system. Whether a Spanish when it exits, it would be difficult to argue the UK does not
corporate is looking to issue bonds or an Italian manufacturer qualify, at least initially.
wants to insure operations around the world, London is where Kept calm. Carried on
that tends to happen. Seventy eight percent of Europes
foreign exchange activity and half its fund management takes Whether or not that happens and irrespective of Brexit, London
place in the UK for example . will remain at the centre of the global financial system. Yes,
the referendum is a major challenge to the UKs financial
Europe needs the City sector, but we should not forget that most of its business -
The City is an ecosystem that is impossible to replicate: a place domestic, European and global will continue to course
where bankers, brokers, lawyers, accountants, advisers, through the City unaffected.
fintechs, funds and intermediaries meet, speak a common This fact was perhaps reflected the day after the Brexit vote
language and operate under a trusted legal and regulatory and the story that didnt break on 24 June: there was no
framework. Europe needs the City just as much as the City market dislocation or a repeat of the chaos we saw in 2008.
needs Europe. The Bank of Englands steady hand, and a similarly mature
Despite that, political considerations on the Continent and the response from authorities across Europe and the Federal
ambition of some to develop their own finance sectors at the Reserve, maintained stability.
expense of London may thwart access from the UK. Axel In the next few years, Britains finance sector will need that
Weber, UBS Chairman and former head of the Bundesbank, solidity as it faces a challenge of extraordinary complexity in
has cautioned against such an approach, saying competition untangling itself from Europes financial system. Nevertheless,
between Rome, Paris, Madrid and Frankfurt may simply push its primary domestic and global role remains undimmed: to
global players to set up elsewhere. serve as an vital source of credit to facilitate the functioning of
This is the danger for Europe and the opportunity for Asia the wider economy. I have no doubt it will meet that challenge
especially for cities like Singapore. Big global banks are not and continue to be a dependable centre of trade finance and
making huge profits in Europe in the first place. While Europes foreign direct investment for both South East Asia and Europe.
top banks struggle to meet targeted return on equity (ROE) and
are working hard to meet higher capital requirements and
18
78% of Europes
foreign exchange
activity and half its
fund management
takes place
in the UK
19
If the UK continues
to attract tourists
and capital from Asia
there is every chance
that the economy
will weather Brexit
and even emerge
stronger
22
It is fair to say that the debt markets paused for breath in the
John Taylor immediate aftermath of the referendum. Lenders needed time
Real Estate and Hospitality Advisory to get their heads around the potential impact of the vote on
KPMG in the UK their books and clients, and to decide their appetite for risk
linked to uncertain valuations.
The pessimism of 'Brexit day' seems like a distant In light of this initial nervousness, credit processes are taking
longer, debt pricing has increased and terms are tight in
memory. The UK, and London in particular, has been
comparison to the fluid market of 2015. But investors remain
remarkably robust. Attracted by the weaker pound, open for business and, crucially, deals are getting done in the
tourists have flooded into hotels, restaurants and bank market.
shops. But a number of concerns persist.
Another effect of the vote is that benchmark interest rates
Business focused hotels will have to wait for people to get have fallen to historic lows. For borrowers with pre-existing
back to work after the summer to truly gauge the impact of the fixed debt this has increased the cost of breaking
vote. There is a strong correlation between the regional hotel arrangements and refinancing. But for those with sufficient
market and GDP, so if, as expected, Brexit impacts GDP credit strength there are opportunities to borrow money at
growth, it can expect to take a hit. historic low rates. An example is IHGs recent issuance of a 10
year 350 million bond with a 2.125% coupon.
That said, anecdotally, regional performance continues to be
robust while London hotels are down on last year (though The market is paying close attention to real estate valuations,
broadly still performing well). The hotel market may also be though post-Brexit transaction evidence is limited. Norges
affected by costs that are dollar based and therefore higher Bank announced a 5% drop in the valuation of their portfolio.
since the drop in value of the pound. We have heard examples of banks asking potential borrowers
for revaluations and reductions in values of above 5%, but not
New investors in town of investors succeeding chipping prices down by 30%. I would
Equity and debt investors remain cautious but open for say a 5 to 10% recalibration is more typical.
business. It has been heartening to see a number of new Asian
So the feared seizing up of real estate and hospitality has not
clients since Brexit, particularly from Singapore and China.
transpired. If the UK continues to attract tourists and capital
From a global perspective London continues to be a top three
from Asia there is every chance that the economy will weather
city for real estate and hospitality investment and is seen as a
Brexit and even emerge stronger.
safe haven economically, legally and from a security
perspective.
In the longer term, the UKs growth will depend far more on
more connections to the fastest growing parts of the world,
Note: Represents ECAA countries plus candidate countries such as South East Asia. It is no secret that the UK has had a
Source: Eurostat protracted debate about where to site new airport capacity to
a) Amongst a sample of airlines and based on change in share price between 28 reach these markets. A decision on where to build it and
May and 28 June 2016. (Source: Google and Yahoo Finance)
starting to roll would send a declaration of intent at this vital
moment that the UK is open for business.
24
Note:
a) MiFID II applies throughout the EEA
25
Conclusion
If any issue dominates conversation in British homes and The fog created by the June referendum does not affect
offices today it is Brexit, and rightly so. Junes vote was the UK alone. As Federico Santi from Eurasia Group
a historic decision that is likely to re-orientate the country points out in this report, the UK and European Union
economically and politically and make a real impression both face serious challenges in the years ahead. It
on ordinary peoples lives. In the maelstrom of events speaks volumes that while the FTSE100 fell 3% the day
however, it is vital to retain a sense of perspective. of the referendum result - broadly in line with the Dow
Brexit is only one of multiple drivers of change for Germanys Dax Was down 7%, the CAC40 in France 8%
business and for many, not the most significant. and the Milan bourse down 12%. Brexit is just one issue
the Eurozone is grappling with right now.
Brexit will induce paralysis in some businesses as they
It will take time for the parameters of Britains new
weigh their options against an uncertain future trading
relationship with Europe to emerge. But based on this
environment. We suspect the winners will be those who
initial market assessment, the UK remains a relatively
evaluate likely scenarios and choose the right approach
attractive European location for inward investment.
in those situations, appropriately managing the risks all
the while. Undoubtedly, we will see ups and down as the Brexit
negotiations play out: moments in which the UK steers
Brexit undoubtedly places domestic and international towards closer relations with the EU; others when it
business in a period of real uncertainty. After leaving, the seems set for something more distant. Economic logic
countrys trading future with Europe depends on may trump political expediency in the end, giving the UK
negotiations with 27 others plus the Commission in a very high degree of access to the Single Market while
Brussels - each with an agenda that may only be allowing its leaders to take action on immigration. That
tangentially related to economic self-interest. route seems to be in the interests not only of the UK, but
also Europe and the wider world.
However, it is also true that international businesses
face major uncertainty all the time whether entering a Heartening as that might sound, organisations cannot
new market, facing new regulations or confronting cross their fingers and hope for the best. They need to
innovative disruption. Brexit is merely another layer of plan for the other possible outcomes whether that be
the uncertainty upon which good businesses thrive. creating European subsidiaries or gaining regulatory
approvals within other European Union countries on a "no
We should not forget that the Brexit vote offers some
regrets" basis.
certainties, and potential upsides, too. For all the
unknowns over UKs economic performance, Single Ultimately, Britains decision to leave the EU means it
Market access or global trade deals, international must cast its gaze beyond Europe. In that search, the UK
businesses can find real opportunities to invest in the UK will find no better trading partners than the countries of
thanks to a devalued pound and lower valuations on a ASEAN. Britain and the region have strong ties going
range of assets. I the current environment, investors back centuries. Brexit now offers a chance for both sides
need to weigh known benefits against the unknowns to renew those ties and forge a new relationship. It will
raised by Brexit. be an exciting ride, if not always a comfortable one.
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