UK –ASEAN business after Brexit

28 Pages·2016·2.9 MB·English

Forging
ahead
UK-ASEAN business
after Brexit
September 2016
1
Contents
Page
The UK’s 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 UK’s 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
Karen Briggs Tham Sai Choy
Head of Brexit Chairman
KPMG in the UK KPMG in Asia Pacific
Britain is living through a moment that only For many years, the UK has been a close trade
comes along once or twice a century: a point partner to South East Asia, and a critical entry
when a country asks itself, “where do we want to point for that region’s businesses in Europe. So
go?” and even “what do we want to be?”. the uncertainty created by Britain’s decision to
leave the EU undoubtedly complicates the
British voters set the direction when they voted to equation for foreign businesses.
leave the European Union in June. But it will be the
UK Government and the European Union that will While the UK is an important destination in its own
ultimately decide the destination, after intensive right, it will have to consider how to re-position itself
negotiations in the years ahead. if it is no longer that springboard to the EU. Much
hangs on talks between Brussels and London.
In the meantime, business continues. The UK has
confounded the gloomier predictions of economic From the UK’s perspective, a rising ASEAN is an
crisis, so far. A swift political transition has settled opportunity it cannot ignore. South East Asia is a
markets and a rash of up-beat data has even led to diverse region in transition that is both a rich source
talk of a ‘Brexit boom’. of foreign direct investment and a burgeoning
market. The ten-nation bloc is home to 600m
This is certainly a moment of opportunity — both for people, a rising middle class and a young and well-
the UK to look beyond Europe towards regions like educated population, which is bolstering the global
South-East Asia — and also for businesses overseas workforce and delivering a demographic dividend to
to take a look at assets in the UK. its economies.
The coming period will be highly uncertain however. The UK will now need to reformulate its ties with
Clients in both ASEAN and the UK need to appreciate ASEAN countries. But with a common interest in
the risks and the political undercurrents at play, while furthering our mutual economic well-being,
still exploring the opportunities above the surface. strengthening our historic links and building on the
We have written this report to help you navigate both UK’s existing interests in the region, I am confident
those risks and rewards. a new and stronger relationship lies ahead.
3
The UK’s current position in Europe
Georgia
Bosnia Herzegovina Moldova
Azerbaijan Montenegro
Armenia Macedonia
Albania Russia
Council of European Ukraine
Europe Economic Area
European Union
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
Switzerland Norway Malta Lithuania Denmark
Portugal
Latvia Hungary Monaco
Slovenia
Schengen Area Spain
Poland
Sweden
4
‘Hard’ Brexit’ or ‘soft’ Brexit
What kind of deal will the UK get?
'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 cliché 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 minister’s 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
cookie cutter model based on a previous citizens in the UK. Poland for example
European Union, what does Brexit
agreement between Norway, Canada or might prioritise the rights of its estimated
actually mean? What kind of relationship
Switzerland and Brussels. 'The model we 790,000 of citizens living in the UK.
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
Kingdom and not an off-the-shelf Power plays
will get its wish?
solution,' Mrs May’s spokeswoman said. Ultimately, the settlement between the
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: Norway’s access to the Single most power and who needs a deal most.
Market, Switzerland’s flexibility on Remaining For instance, the EU-27 and UK are each
regulations, Iceland’s control of its members are others’ most important trading partners.
borders and Turkey’s membership fee. Proportionately however, while the UK
splitting and
Unfortunately, even the most ardent 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 UK’s 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 Europe’s negotiating get anything more than vague outlines of
that would cost it access to the world’s 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 union’s 27 remaining It could be some
Not Norway. Not Canada members are splitting and coalescing time before we
into rival groups: the northern Europeans,
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
c
PaMbi’nse stp’so kfierstw poomsta-snu emcmhoeerd m ae keetyin g, the France. outlines of any
‘Leave’ demand by saying the new The Mediterranean group’s 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
forecasting the outcome of negotiations. — only in a handful of countries, notably the Netherlands, is a
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.
10%
gmacivacerek siets tt otbotua tl h dceo nesitsnr ognlo et atrgardeee magernete mis emnot rteh alitk ealsyo t oc obvee arsn saedr vhiocec,s .c oTmhep reexhtents itvoe free
over EU migration. which Britain’s 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 UK’s 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
2. Downside scenario their desire to discourage further exits is reinforced in this
scenario.
Fragmentation risks re-surface (30% probability)
Overall then, a new EU crisis increases the risk that Brexit
There’s no immediate risk of other countries following the UK
negotiations result in a less than optimal agreement. Although
out of Europe. But despite the negative short to medium term
a breakdown in the process and reinstatement of the WTO
impact of Brexit on the British economy, the vote to leave sets
regime would remain unlikely, the UK risks losing a greater
a precedent for Eurosceptic parties elsewhere.
degree of access to the EU Single Market, particularly on
Three factors fuel the risk of fragmentation: services. For instance, in addition to losing euro clearing
licences, EU-based financial institutions could face losing
— The challenge presented by refugees already in Europe
passporting rights to operate in Eurozone countries.
with the possibility of new inflows from Syria and Turkey
— The increased likelihood and frequency of terrorist attacks
3. Upside scenario
in France and other countries
Deeper integration (10% probability)
— A sputtering economic recovery
In a more positive but less likely scenario, the EU responds to
Against this backdrop, Eurosceptic sentiment in core EU
Brexit with greater integration, particularly in the Eurozone.
member states and domestic political issues in a number of
countries combine to block a quick and coordinated response French and German elections in 2017 could lead to better
to a possible future economic crisis. coordination between these two core Eurozone members.
With the next round of elections far off on the horizon, the
Periphery Eurozone countries are especially vulnerable,
leadership of both countries has the political space to advance
especially Greece and Portugal. But Italy represents perhaps
contentious reforms to EU institutions, buoyed by sustained
the biggest risk to Eurozone cohesion over the medium term.
economic recovery.
The country faces the possible collapse of its government after
a referendum later this year, and the success of the We could see this scenario if the leaders of these countries
Eurosceptic Five Star movement in 2018 elections. A Five Star recognise the long-term, structural threat to the integrity of the
administration wouldn’t threaten Italy’s euro membership EU posed by Brexit. They respond by strengthening EU
directly, but would likely not be well received by the markets. institutions to ensure that the union can continue to deliver
Italy’s economy would struggle to respond effectively to falling growth, can respond efficiently to future economic crises and
trade and investment. can improve quality of life for the majority of its citizens.
More broadly, the EU would struggle to manage a new Under these circumstances, the UK is less of an impediment
recession. If one or (more likely) several member states faced to greater security and defence cooperation. Eurozone states
economic crises, bailouts, which are always a political can also take critical steps to resolve structural issues in the
challenge, would become even more testing, due to 'austerity Eurozone’s economic governance — most significantly,
fatigue' in periphery Eurozone members and 'bailout fatigue' in completing a banking union and instituting the capability to
core states. unleash a sizeable counter-cyclical fiscal policy at an EU level
— where some states subsidise others in response to crisis.
In a worst-case scenario these issues lead to the exit of one,
That might look like a more ‘political’ EU budget or mutualised
or more likely, several member states from the Eurozone, the
debt issuance for example.
EU or both. A smaller but more economically and socially
cohesive currency block is left behind. Brexit implications
Brexit implications This scenario is not hugely different from the baseline in terms
of its impact on Brexit negotiations, but is a little more
This scenario has major repercussions for the UK. If Eurozone
beneficial for the UK.
recovery falters, potentially to the point of triggering another
recession, there is even greater reason to avoid the disruptions Core Eurozone countries are potentially distracted by
to trade and investment that would result from a collapse in negotiations over advancing integration. But the scenario
the talks. implies that the immediate risk of further exits is perceived to
have receded, leaving EU leaders more inclined to make
A new Eurozone crisis makes EU membership less appealing
concessions to the UK (most significantly on free movement)
for non-euro EU member states. As the prospect of their own
to avoid damaging economic relations.
exit becomes less remote they have cause to be more lenient
to the UK.
But Eurozone countries, Germany and France most of all, have
much louder voices in the negotiations. In Eurozone countries,
difficult negotiations about the internal Eurozone crisis use up
political capital. The need to counter Eurosceptic sentiment at
home means there is less incentive to grant compromises to
the UK. In the end, EU and Eurozone membership is a more
significant national interest for these countries than the
potential losses in trade and investment with the UK.
In addition, the EU Parliament and Commission, both inclined
towards federalism, are heavily involved in the process and
7
What happened on 23 June?
Some thoughts looking back
cooperation, it was also a protest on behalf of 'ordinary people
who felt left behind'. Indeed, Theresa May’s first speech on
the steps of Downing Street focused on how her government
would defend the interests of ordinary people.
And if there is one issue that motivated this group more than
Rachel Hopcroft CBE any other, it was immigration. Academics and newspaper
Head of Corporate Affairs, pundits have made much of demographic trends in the vote —
KPMG in the UK old ‘Leavers’ versus young ‘Remainers’; the north for ‘Out’ and
the south for ‘In’ (in fact Scotland was strongly in the Remain
camp and the south of England voted to leave just as much as
northern areas of England). But through divisions of class,
Most people thought the vote would be tight, but region and age, immigration came through time and again as a
that the Remain camp would edge it. So the shock unifying factor for Leave voters. 'Take back control' — of both
the morning after was palpable — on both sides. Britain’s borders and a perceived loss of sovereignty to
Even Boris Johnson — one of ‘Leave’s chief Brussels — was the most resonant slogan of the campaign.
campaigners and now foreign secretary — reckoned
Remain had it as the polls closed. Leave supporters felt
That shock has morphed into other, more complex, emotions empowered – that they were
as time has gone on. On the Remain side, mainstream and finally being listened to
social media reflected people’s sense of personal crisis and
despair at Britain’s future. Revellers at Glastonbury — the
weekend after the vote — were said to be as gloomy as Recent governments have certainly struggled to get a handle
anyone could remember at the music festival. on the immigration issue, missing their own immigration
targets. The Remain camp then failed to effectively counter
For just over half of the electorate who voted to leave, there the charge that higher levels of immigration lay behind a
was a sense of liberation — that Britain was casting off a shortage of school places, longer-waiting times to see doctors
distant and unaccountable institution. The ‘freedoms’ that and the rising cost of housing — all issues that have as much
Remain had campaigned on — to work, travel and trade with to do with a failure of supply as sky-high demand.
Europe — were precisely the freedoms that many Leave
supporters had never felt in the first place. And then there is the fact that Britain has just never been that
‘European’ in the first place. That was always General De
Leave supporters felt empowered — that they were finally Gaulle’s point in arguing against British membership of the
being listened to. Among them were the four million who had Common Market in the 60s. Perhaps he was right. Research
voted for the United Kingdom Independence Party (UKIP), at from the London School of Economics shows the UK has
last year’s general election, but who were left with one MP consistently been the most Eurosceptic of all the European
under Britain’s ‘first past the post’ system. In a vote where nations over the last four decades.
every vote would count, the turnout in areas favouring Leave
was extremely high by historical standards. For 43 years, Britain has sat reluctantly inside Europe
wondering what life might be like outside. It will be interesting
So as much as this was a vote about Britain’s membership of a to see if attitudes change now that we find ourselves outside,
28-nation grouping designed to promote free trade and looking in.
UK votes to LEAVE the EU
Leave Remain
51.9% 48.1%
17,410,742 votes 16,141,241 votes
Electorate 46,501,241 Turnout 72.2%
http://www.electoralcommission.org.uk/find-information-by-subject/elections-and-referendums/upcoming-elections-and-referendums/eu-referendum/electorate-and-count-information
8
The economic impact: A new dawn breaks
Alternative scenarios
The uncertainties surrounding the current outlook
are almost unprecedented. A lot will depend on
Yael Selfin
the path the new government decides to take, as
Head of Macro Economics,
well as on the actions of businesses and
KPMG in the UK
households as more information emerges in
regards to the exit arrangements.
The EU referendum result will trigger changes to the The Brexit vote has put increasing pressure on the
UK economy. In the short term, uncertainty and UK government to address net migration and
concerns over the nature of future trade agreements meet its 100,000 target. A fall in net migration will
will see the economy weaken. The medium and have a larger proportional impact on the labour
long-term prospects of the UK economy will depend force than on the overall population because
on a range of policy decisions. migrants have higher labour market participation
than the wider population. It is still unclear how
The prime minister has already announced that, faced with far and how fast the government will move to
the new challenges ahead, previous fiscal targets will be
address migration concerns expressed during the
abandoned. This should see stronger government spending
referendum. Our stress scenarios incorporate
in coming years, though concrete plans may not materialise
some of these possibilities, together with
until late in the year.
assumptions about further changes to the
The uncertainty around the shape of Britain’s exit, and the exchange rate and risk premium.
prospects of a smaller internal market for those companies
based in the UK are likely to hit investment hardest (see Our first stress scenario sees consumer
chart below). spending fall and investment declining more
sharply. Government spending picks up slightly
Prospects for UK GDP and exports remain strong, but together they are
4 not enough to offset the shortfall in demand, and
3 the UK economy grows by 1.2% in 2016 before
contracting by 0.7% in 2017. This stress scenario
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 we’ve already seen since the referendum results, experienced in the Great Recession of 2008-9.
causing a significant rise in inflation in coming months.
Annual % change
9
Article 50: How the UK’s exit mechanism works
For these reasons, it is thought Article 50 will not be triggered
until January 2017, and could even be delayed until Autumn
2017, after the French and German elections.
'A disorderly exit'
Catherine Barnard As to the divorce negotiations themselves, failure to reach an
Professor of European Union agreement within two years (and no extension) will mean a
Law University of Cambridge disorderly exit from the EU. This would be unwise, given the
vast range of issues at stake (such as long-term research
funding, the status of EU nationals living and working in the UK
and moving UK-based EU agencies across the Channel).
Once an obscure provision in the 2009 Lisbon Treaty,
Article 50 is now centre stage in the Brexit debate as
the rulebook by which the UK will leave the EU. The
man who wrote it, former Italian Prime Minister
Giuliano Amato, said he never intended it to be
The delay and uncertainty
used. It was meant to be a 'classic safety valve'. Its
256 words now hide a myriad of legal questions and is damaging for the EU,
uncertainty. distracting it from other
Some things are clear however, in particular that the decision pressing issues such as
to withdraw from the EU must be made in accordance with
the UK’s own constitutional requirements. But what are the Eurozone and the
these? The prime minister says it’s her decision to start the
migrant crisis.
process to leave the EU, using her ‘prerogative’ or executive
powers. Others argue that an Act of Parliament is required
since the decision to start the Article 50 process goes to the
core of the UK’s membership of the EU. These questions will For the UK, the delay is
be examined in an important case going to the High Court in necessary practically,
October and then on to the Supreme Court in December.
politically and legally
There’s a further issue about Scotland and Northern Ireland,
both of which voted to remain in the EU. What say will these
nations have in the process?
It is one thing for member states to agree to the divorce
When to press the trigger? agreement by a ‘qualified majority’ decision. It is quite another
for the parties to agree the future shape of the relationship
This domestic debate is proving contentious because the EU between the UK and the EU. Article 50 is virtually silent on the
wants the UK to get on with triggering Article 50 so that the latter. It merely says that the arrangements for the UK’s
highly complex divorce process can begin. The delay and withdrawal should take account of 'the framework for its
uncertainty is damaging for the EU, distracting it from other future relationship with the Union'.
pressing issues such as the Eurozone and the migrant crisis.
Article 50 thus imposes no obligation for there to be a future
For the UK, the delay is necessary practically, politically and relationship. If there is to be one, the form that might take is
legally. Practically, to allow time to set up its new Brexit subject to heated debate. And any future relationship may
department and to work out what exactly it wants from the need to be decided by unanimous agreement in the Council of
negotiations. Politically, because elections in France and Ministers together with the agreement of up to 38 national and
Germany next year may usher in new heads of state with regional parliaments.
different agendas regarding the UK. And legally, because once
Article 50 is triggered there are just two years to complete the If the UK were to change its mind, Article 50 makes no
negotiations (when Greenland left the EU, exit negotiations provision for the process to be stopped. But the majority view
took three years, and this for a sparsely-populated country with is that the divorce does not become final until the agreement
only one big issue to resolve — namely fish). The two-year is reached; there is time for a rethink. However, the current
period can be extended, but only by the unanimous agreement political debate suggests that Article 50 will be triggered
of all 27 states, thus putting the balance of power in the hands sooner rather than later and that the UK is heading for the
of the EU. door.