Brexit, and how Singapore will be affected

For many of us in Singapore, when we think of Britain, we're probably thinking of how the England, Wales and Northern Ireland national football teams are all still in the UEFA Euro 2016. We may even be starting to bet on the upcoming England-Iceland game, now that England's not going to be facing Portugal at the Round of 16.

But for the rest of the world, it is all about the referendum where the UK voted to leave the European Union.

So, what is Brexit?

Simply put, it's a combination of "Britain" and "exit", and sounds much cooler than "Bremain", the combination of "Britain" and "remain". What? You actually want to know what it means?

Essentially, many people in Britain weren't too happy with the way their country operated within the European Union. At the risk of oversimplifying the situation, the EU acts like a single entity. Being part of the EU meant that Britain had to adopt the EU's policies on immigration, their trade and commerce regulations and other laws, many of which Britain felt were disadvantageous to them.

In fact, as much as possible, Britain has consistently tried to keep their national identity intact despite being a part of this group of 28 countries in Europe. For example, unlike a majority of the member countries which has since adopted a shared currency, the Euro, Britain has kept the Pound Sterling.

However, objectively speaking, there are just as many benefits that come with Britain being a part of the EU and a major player at that. For one thing, as part of a single market, Britain also enjoys the freedom to trade, work and travel to other countries in the EU. Those in Britain who favour staying in the EU are effectively saying that the benefits of staying within the EU far outweigh the economic disadvantages and the loss of autonomy and identity that come with that decision.

Just how would the Brexit vote affect us in Singapore?

The exit of a major global player like Britain from the EU is unprecedented, and therefore, there is no way to say with any certainty what the consequences are. And if there's one thing that foreign exchange markets really hate, it's the uncertainty of political decisions.

The value of the pound sterling has fallen steadily against the US dollar (and by extension, most other global currencies, including ours) since the decision to have this referendum was officially made following Britain's general elections in 2015.

The drastic drop in the value of the Pound Sterling currently happening now, with the vote in favour of leaving the EU, further drives home how this uncertainty is wreaking havoc with the British currency.

How should we respond to the lower Pound Sterling?

What we'll be talking about above is our best educated guess, but indeed, anything is possible. That said, here are three ways that the Brexit vote can affect us and how we can respond.

1. Trade

The Singapore government has recently concluded negotiations for a Free Trade Agreement with the EU, the first such agreement between the EU and any ASEAN country. Basically, this means that any exports and imports between the EU and Singapore will be cheaper and subject to less restrictions and requirements. This is great news for us - in 2015, we imported more than 29.7 billion euros (S$44.46 billion) worth of machinery and transport equipment, chemical products and other manufactured goods from the EU.

That said, a large majority of our trade with the EU is actually with Britain. So while signing the FTA with the EU will still be a huge boost for our economy, it remains to be seen if Britain will have more or less bargaining power with Singapore when they leave the EU.

Why is it so hard to predict? Because on the one hand, it's possible Britain leaving the EU could result in a weaker British economy and make them less popular with Singapore businesses who would look to other countries in the EU to trade with. This would result in Britain having less bargaining power when it comes to imports and exports.

On the other hand, with Britain being such a major business partner with Singapore, their freedom from the EU may result in Britain having more influence when it comes to trade deals.

Either way, a lower Pound Sterling would make imports from Britain even more palatable. Even if Britain votes to leave the EU today, subsequent negotiations means it would still take 2 years for the exit to take effect.

2. Investment

Singapore is a favourite of EU investors, with about 25 per cent of total foreign direct investment in Singapore coming from them. At the same time, Singapore is one of the largest investors in the EU, only third behind Japan and Hong Kong.

However, just like our trade situation, a significant majority of this investment from and with the EU is through Britain. Which means the exit of Britain from the European Union will affect the flow of investments from Europe. We can expect that investments from Britain may slow in the coming years, as a weaker British currency would mean that it would be costlier for British companies to expand their businesses here.

That said, many firms, including HSBC, Shell, Rolls Royce and Standard Chartered have already spent the past few years growing their presence in Singapore. As a result, the lower Pound Sterling would actually have the opposite effect, possibly encouraging Singapore investors to pump more money into Britain instead. This may not happen overnight, of course, as the uncertainty of the next two years will likely lead to a wait-and-see approach.

3. Tourism

What we can expect immediately is a drop in visitor arrivals from the UK to Singapore. Most of our visitor arrivals from Europe have been from Britain, and a weaker Sterling Pound does not seem to have affected their numbers much. In fact, there have been more visitors from the UK this year so far than in the same timeframe over the past two years.

However, with the uncertainty of the country's exit from the EU causing currencies to weaken significantly, it will soon be much more expensive to visit Singapore. On the other hand, the stronger Singapore dollar would make travelling to the UK much more enjoyable, not to mention shopping online.

A final word about Brexit

It needs to be said that this is ultimately a national issue for Britain. Effectively, they should not be concerned over how their decision affects the rest of the world. We can say all we want about a potential Donald Trump presidency for the United States but, when it comes down to it, have no real ability to control how they vote later this year. It's the same for Britain.

We in Singapore should respect and acknowledge this decision that Britain has voted for, and work with Britain to maximise the benefits of the consequences and reduce the disadvantages.

This article first appeared on MoneySmart

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