Author: Chutima Tontarawongsa, Ph.D. and Kantima Vongsthapat
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- On June 24, more than 33.6 million Britons, a huge turnout of 72.16 percent, voted in the Brexit referendum that resulted with a majority of voters in favor of the United Kingdom (UK) leaving the European Union (EU). Later on that day, the UK Prime Minister David Cameron declared the official result with the Leave camp winning by 52 –48% split and announced his resignation.
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| Country |
Market volatility from the start to the end of poll counting |
The implication on the market |
UK |
- GBP/USD: ↓ (9.46%)
- FTSE: ↓ (8.67%)
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- In the short term, Bank of England (BOE) is prepared to inject additional fund into Britain’s financial system to prevent liquidity crunch.
- In the long term, the UK economy is expected to contract by as much as 3-10% by 2030 as a result of obstacles to trade, investment, and movements of capital and labor. The severity of the damage will depend upon the new agreements between the UK and the EU. The UK will have at least 2 more years before its EU membership expires.
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EU |
- EUR/USD: ↓(3.54%)
- Euro Stoxx: ↓(10.84%)
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- The EU economic recovery could be delayed from falling business confidence and financial market volatility. EIC expects the European Central Bank (ECB) to ease monetary policy further to provide support for the economy.
- Brexit raises the risk that other EU members will hold similar referendums in the future. Surveys reveal that if a referendum on their country’s EU membership was held now, approximately 40 % of the Italian, French and Swedish voters would support their country leaving the EU.
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US
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- USD Index: ↑(3.21%)
- S&P 500: ↓(4.67%)
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- Global economic and financial uncertainties will likely delay the FED’s decision to raise its policy rate. As such, market expectation of two rate hikes within 2016 will be unlikely.
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| Japan |
- JYP/USD: ↑(3.97%)
- Nikkei: ↓(5.40%)
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- Although the BOJ has recently maintained its policy rate, it is expected to announce short-term measures to stem yen appreciation.
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| Thailand |
- THB/USD: ↓(0.85%)
- SET: ↓(1.76%)
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Direct impact on the Thai economy will be limited, because the share of Thai exports to the UK accounts for only 2% of the total export value. However, exporters of processed chicken meat, who rely mainly on the UK and the EU markets, will suffer a major loss. Moreover, commodity exporters will experience volatile prices, while importers may face higher costs from the strength of US dollar and yen.
- Thai baht will weaken slightly due to capital outflows in the short run. However, such outflows should be limited, thanks to Thailand’s relative financial stability compared to other regional countries, as indicated by a large capital account surplus and a strong international reserves position.
- In the long term, EIC believes that Brexit will open up greater possibilities for direct trade negotiations between Thailand and the UK. Nevertheless, if economic slumps in the UK and EU are prolonged, Thai export and tourism industries could take a hit. Furthermore, Thai businesses may incur additional costs as they have to work with trade partners from the UK and the EU separately.
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Source: EIC analysis based on data from UK Treasury, Ipsos MORI and MOC
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- To conclude, the Brexit referendum result has intensified the degree of uncertainties in the already fragile global economy. Major risks will stem from economic downturns in the UK and the EU, which might have spillover effect on other regions via trade and financial market channels, triggering policy responses by central banks and government authorities. In addition to economic impacts, Brexit—which many perceive as the beginning of an EU fracture—might also lead to resounding social and political repercussions.
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