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28 Jun 2017

International Economy

One Year into the BREXIT: Surrounded by Political Storms Unpredictable Path Ahead (Current Issue No. 2852 Full Ed.)

A year has passed since the Brexit vote was undertaken, but progress has not been significant toward implementation of the resolution. According to Article 50 of the Treaty of Lisbon, the UK is scheduled to officially leave the EU not later than March 29, 2019. Until that date, the EU would negotiate with the UK on new agreements concerning their relationship. The period in-between – 21 months – is therefore crucial toward seeking a proper format for both sides wherein political uncertainties now make a smooth resolution hard to predict. Conclusion may take one of several different scenarios. In the best case, the present UK government would be able to gain Parliamentary support and successfully effect the Brexit in time, in which case, the government could accept an EU proposal to gain the benefits of a “Soft Brexit” beneficial to all parties. However, if they cannot find a path forward through present difficulties and then must call for a new election, Brexit negotiations might be canceled and all matters ‘return to zero'. It remains to be seen which will occur.

If Premier Theresa May's coalition government can pass the political test, KResearch views that the UK will agree to ‘pay the Brexit bill', which is the most important condition of the EU for the UK to gain a single market and customs union – i.e., a ‘soft Brexit' – as well as be granted a grace period for adjustments. Their business sector would benefit from this scenario, which would make up for the costs involved. But if an agreement cannot be reached within the timeline, the UK must resort to FTA talks with the EU, and UK businesses would then have to undergo EU customs procedures that would revert to normal (MFN) rates, which would affect raw material movements within UK supply chains as part of the EU's most important production bases. An unclear direction in negotiations seems to add more risk to EU businesses, given that the supply chain interconnectivity between the two sides is self-evident. Therefore, further developments should be closely observed. So far, since the UK voted to leave the EU, their real economic sector has not been severely hurt, but from now on, slower economic growth may occur due to various elements, e.g., weakened domestic investment and greater political uncertainty causing the GBP to become more volatile, etc., until a clear way forward can be found.

Overall, KResearch still considers that the UK and the EU have both absorbed the initial Brexit shock for a while now, and the period of highest fragility has already passed. Thus, Thai exports to the UK over 5M17 rose 16.0 percent YoY, which may then become a driver to push our full-year export performance upward to 6.2 growth percent YoY (versus the 0.7-percent pace recorded in 2016). The total export value should reach USD4.09 billion, i.e., within a projected range of 5.0-7.1 percent growth at USD4.05-4.13 billion. Thai exports to the EU only may achieve 3.2 percent growth YoY in 2017 (versus 0.4 percent in 2016) to a total of USD22.77 billion, within a range of 2.3-4.3 percent growth and an aggregate value of USD22.57-22.99 billion.

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International Economy