US $ 2tn earthquake! What next?

Friday, June 24, 2016 saw the global markets rumbling and initially seeing US $ 2 trillion dollars wiped off within hours as a result of the Brexit news, giving shockwaves around the world. This was the magnitude of the decision taken by 52 percent UK voters to leave the European Union (EU) single market after 43 years.

It is extremely difficult to say what the future holds for Europe and the UK and the global economy as top European leaders now ponder on what next. The only outcome would be market volatility for a considerable time as the process of disengagement will take its own time.

The exit of the UK, the fifth largest economy of the world, from the EU, which is the biggest market in the world, will have consequences for trade, finance, security and geopolitics. The initial reactions of the currency and the commodity markets reflect great volatility. The British pound against the dollar saw a dramatic movement from hitting a high of 1.50 and then falling to 1.33 as the result was evident. This was a 30-year low against the US dollar. This volatility in currency will be there for some time until the markets accept the reality of the new change. The next important area to watch would be how the central banks will look at the monetary policy and what will happen to the interest rates and bond markets over the next few months.
 

The disengagement
The Shippers’ Academy Colombo believes that this is only the first step of a democratic consent to change the political model in the UK. Now under Article 50 of the Lisbon Treaty, the EU and the UK will have to agree to changes, which will take place and the UK will have to untangle itself from Europe from many fronts, which is going to have tough negations. These will include trade/finance arrangements, migration arrangements, education and movements across borders of citizens, etc. Politically the referendum reflects a strong division of opinion from Scotland and Northern Ireland compared to rest of the UK. In the long term this may result in more demand for separation within the UK as already Scotland is mooting a second referendum and it may trigger and trickle down to Europe. This will have many global geopolitical consequences the future generations will need to manage/handle.

The process of transition will take some time, the existing trade arrangements, etc., will have to be renegotiated and may last for another two years or more, until formal disengagement takes place. However, it seems that the process will start after the UK appoints a new prime minister in October as Cameron feels that he does not have a mandate to move forward to negotiate, although European leaders are anxious to expedite the process of divorce. This is probably due to the fact that both France and Germany are having elections in 2017 and seems that the EU leaders are keen to move forward to strengthen their position as soon as possible.
 

Sri Lanka should make this challenge an opportunity
What has happened and what will happen out there is totally out of our control and we must adjust our policy to face the external shocks. In the case of Sri Lanka, in the medium term, we too will have to face changes and the challenges of the new world order as some describe it as the biggest political change after World War II and USSR Perestroika movement from 1985 to 1991. 

In the immediate short term, the currency movement and the pound getting weaker will have an impact on all export pricing and inbound tourism and general business with the UK and the EU. One major challenge in the medium term if Sri Lanka gets GSP Plus in the early 2017 is that we may have a disadvantage as more than 40 percent of our apparel and other GSP Plus exports go to the UK in the EU market. The UK will now have to re-establish trade arrangements which they have built over the last 43 years in the EU and re-establish new ones with other countries. If we as a country cannot develop a bilateral arrangement with the UK, it will affect the apparel and rest of the exports in some way in the future.

Given the outcome, Sri Lanka should not look at everything as a negative as in today’s context such disruptions may open many new doors for a small economy like ours. Not only us, but all global markets will have to adjust to the new Europe/UK environment and be strategic in many ways. This gives us a good reminder and an opportunity to once again realise the importance of having strong bilateral relationships as the risks of regional turmoil can be dangerous if we solely depend on regional arrangements. 

Shippers’ Academy Colombo has been supporting any initiation for strong bilateral trade agreements with the USA, India, China, Singapore, Japan and others to exchange trade as well as services that would benefit the country. We specially need to understand that we are an extremely small market and that we need to hook up to the global supply chain to benefit from world trade.

The days, weeks and probably the coming months, we will have to watch as how the world will react to Brexit, anybody’s guess can be correct as the uncertainty and the aftershock of this outcome is yet to be unfolded.

(Rohan Masakorala is CEO of Shippers’ Academy Colombo, an economics graduate from Connecticut State University USA, past Chairman of Sri Lanka Shippers’ Council, immediate past Secretary General of Asian Shippers’ Council and a former Secretary General of Joint Apparel Association Forum)