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30 Jun 2016 00:00
Arrested development: Pro-European Union protestors gather in Trafalgar Square, London, this week to express their anger and disappointment at Britain’s decision to leave the EU. (Paul Hackett/Reuters)
The world woke up after
the British voted to leave
the European Union last
week much like revellers
after a raucous party:
surveying the damage with a massive
headache and blearily asking:
“How the hell did that happen?” and
“What’s it going to cost to fix it?”
As the clean-up gets going, it is
clear that the financial services sector
– and Britain’s in particular –
has the biggest babalas.
London stands to lose its position
as a leading light of the financial
world if the United Kingdom follows
through on a Brexit and, according
to experts, this spells bad news for
Britain, given the large part financial
services plays in its economy.
According to research released
earlier this year by TheCityUK – a
lobby group for the sector – the UK’s
financial and related professional
services made up about 12% of the
country’s economic output in 2014
and employed more than 2.2-million
people countrywide. The sector contributed
11% of Britain’s tax receipts
in 2014-2015 and contributed more
than all other net export industries
combined, through the £72-billion
trade surplus it generated.
quite significant for a country with a
consistently high trade deficit.
Adrian Saville, chief strategist at
Citadel Asset Management, likened
the importance of the UK’s financial
services sector to the mining sector
in South Africa.
“Its spillover, multipliers and linkages
make it a critical component [of
the UK economy],” he said, adding
that if the financial centre dissolved,
the UK economy would come under
British banks experienced massive
declines in their share prices following
the referendum, with some
forced to temporarily halt trading
on the London stock exchange on
Monday. Although they made recoveries
later in the week, major UK
banks such as Barclays and the Royal
Bank of Scotland saw their share
prices decline by about 20% and
The British government had its
credit rating downgraded from the
coveted AAA to AA status by S&P
and Moody’s changed its ratings outlook
on 12 banks and building societies
from stable to negative.
The Brexit result has sparked fears
of a recession. Britain has a large
trade deficit, but a currency that has
remained strong over time, according
to Kokkie Kooyman, portfolio
manager at Denker Capital.
With a Brexit vote, the UK is likely
to lose the easy access it has to the 27
EU countries to which it exports.
“It’s safe to say that Britain’s
exports are likely to decline,” said
Kooyman, which means its trade
deficit will probably worsen, increasing
the prospect of job losses and the
start of a recession.
The effect on the banks was partly
driven by these expectations; a recession
is never good for banks because
it leads to rising bad debts and
slower loan growth, he said.
The potential loss of London’s
position as financial hub, with easy
access into European markets, was
another factor, he added. If large
banks and financial services companies
are forced to relocate to mainland
Europe this could mean further
job losses in London and a lowering
of property prices.
Asmita Parshotam, a researcher for
the economic diplomacy programme
at the South African Institute of
International Affairs, said one of the
advantages the UK enjoyed through
its membership of the EU was the
ability to freely operate banks, insurance
companies and similar firms on
mainland Europe – provided there
was an established base in the UK.
This is known as “passporting”, and
applies to Swiss and United States
banks as well.
“However, if Brexit does indeed
go ahead, non-EU banks would now
be required to establish a subsidiary
in EU member states and satisfy all
these requirements accordingly, in
addition to satisfying UK financial
regulations, thereby increasing their
regulatory burden,” Parshotam said.
The absence of passporting could
result in some banks moving their
operations to other European cities
for ease of business.
“On a long-term basis, there could
also be potential implications in
terms of [foreign direct investment]
flows into the UK’s financial services
sector,” she added.
There is much uncertainty
over how Britain will now
negotiate its exit from the
EU. It must start with Britain
invoking Article 50 of the Lisbon
Treaty, which governs how an EU
member voluntarily leaves the union.
This mechanism has never been used,
said Parshotam, and is uncharted territory
for the UK and the EU.
Key member states, including
Germany and France, have indicated
that they are not prepared to engage
in talks until Britain initiates formal
withdrawal proceedings, Parshotam
Although the timeline for exit
negotiations is about two years,
given the stature of Britain’s economy
and its role in the EU, there are
already suggestions that this is an
unrealistic timeframe, she said.
In the meantime, Britain remains
bound by all the rules and normal
activities of the EU, said Parshotam,
but British representatives to the
European Council will not participate
in debates or any voting related
to their withdrawal.
But Saville argued that, given the
profound effects a Brexit will have on
the UK’s economy and its financial
services sector in particular, Britain
would find a way to remain in the
EU and “London would find a way to
It could mean finding a sweetheart
deal to retain its access to the wider
European market, he suggested, or
even backtracking on the results of
Virgin boss Richard Branson,
whose group of companies lost a
third of its value early this week,
has already called for a second poll,
while the Guardian reported that
US Secretary of State John Kerry
expressed scepticism that the UK’s
political leaders, including those at
the helm of the leave campaign, even
knew how to begin a Brexit.
The hit taken by the UK financial
sector has rippled down to South
Africa’s banks, but the risk of any
severe contagion for the local industry
appears limited, analysts agreed.
One area of concern was the extent
to which South African banks’ offshore
funding comes from Britain,
said Kooyman, but given that the
sector also sourced funding from
Europe – and Switzerland specifically
– this was likely to have “a
Investec has some exposure to the
UK, given that a large proportion
of its profits come from its British
banking and wealth management
business, Kooyman added.
Questions have also been raised
regarding the effect of Brexit on
Barclays’s sale of its Barclays Africa
According to Jean Pierre Verster,
portfolio manager at Fairtree
Capital, Brexit was unlikely to have
an effect on the transaction.
One of the main reasons alluded to
for the sale, Verster said, was compliance
with UK banking regulations,
specifically the level of capital
requirements that needed to be held
“These have not changed,” he said.
A positive effect on the proceeds
that Barclays would receive could
come from the conversion of rands to
pounds, as a result of the weakening
of sterling, he added.
Nedbank’s exposure came through
its relationship with its parent, Old
Mutual, which is in the process of a
large demerger of its businesses.
But earlier this week Old Mutual
chief executive Bruce Hemphill said
that, although the Brexit vote and
the resultant volatility it had caused
“may impact the performance of the
underlying businesses”, the group’s
strategy had not changed.
Matthew Pirnie, primary credit
analyst at S&P Global Ratings, said
although a number of local banks
did have direct links through various
subsidiaries in the UK, and would
have to remain aware of what their
exposure was and how the UK economy
was performing, there was little
risk of any major Brexit contagion
for South African banks.
More troubling for local banks
were the indirect risks that Brexit
posed, argued Pirnie, such as
another potential wave of investor
“Any risk aversion will strengthen
the dollar, strengthen gold and
weaken emerging market currencies,”
he said, adding that it would
lead to inflation and possible interest
rate hikes, which could affect South
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