Risks and opportunities for UK businesses post-referendum

 

As we move on from the EU referendum outcome, we consider how businesses are managing the risks and opportunities around the leave vote and how they can continue to thrive in a post-EU UK.

Rain Newton-Smith

Rain Newton-Smith is the CBI's Director of Economics, following a period as head of the Emerging Markets team at Oxford Economics and a role with the MPC.

Rain Newton Smith

Our other contributors include:

Yuri Polyakov (MD and Head of Financial Risk Advisory, Lloyds Bank), Tom Stoddart (Head of FX Sales, Mid-Market & SME Lloyds Bank) and Thorsten Seeger (Head of SME Financial Markets, Lloyds Bank).

Our contributors shared their views around the referendum and what businesses should consider in a new environment to emerge stronger from this period of uncertainty.

We go deeper into the mind-set of UK businesses to uncover the real impacts and reactions the leave decision has created and offer a comprehensive set of learnings to help formulate a stronger strategic approach to the risks and opportunities the future might hold.

Q. What are the broad economic and financial implications of the UK’s vote to leave the EU?

A. Rain: The main thing to reflect on is that in some ways our relationship with the European Union hasn't changed yet. It’s all to play for, as well as our relationship with countries outside the EU. One of the things our members have said is, "Yes, we saw a lot of volatility in financial markets, we expected that, but actually there weren’t any issues around liquidity and the markets were operating well, even if we saw big drops in the exchange rate." From that point of view what we're not facing is a Lehman-style crisis, this is not the global financial crisis mark II.

The nature of the impact is quite different, it's a long-term structural disturbance. And I would say that some businesses prefer to describe Brexit as a change in the nature of our relationship, rather than as a shock.

Q. Did the lessons learned from the 2008 Global Financial Crisis make the UK better prepared to deal with the EU referendum outcome?

A. Rain: Yes, we've certainly learned a lot. One of the lessons I think the Bank of England has very clearly understood is the importance of early public communication. Overall, the banks are well capitalised and the Bank of England stood ready to provide more capital. The Financial Policy Committee (FPC) have reduced the countercyclical buffer from 0.5% to 0% and that should have really helped the flow of liquidity and credit through the banking system to businesses. So I think businesses are less concerned about issues around credit constraints at this stage, which is good news.

Yuri: Having gone through a crisis and seen how market uncertainty can happen from one day to the next, and how quickly things can get out of control, has meant that businesses have been better prepared.

Rain: One of the unknown areas is what happens to consumer confidence. And there is a bit of a danger that memories of the global financial crisis are still quite fresh, and so job insecurity might have an impact on consumer confidence. Which again is why businesses are really keen that consumers maintain a ‘keep calm and carry on’ attitude.

Q. Has there been a shift in sentiment from the initial reaction to the vote?

A. Yuri: In the run up to the event some businesses were quite cautious about investment and putting some of those decisions on hold. Two or three months before that, there were also businesses who accelerated their funding or hedging programmes to ensure that they were in a better position to go through this period of uncertainty.

Many people I spoke to didn’t expect the outcome and were unsure how to react. Whilst there is still an element of uncertainty, people are starting to get back to their drawing boards and decide to what extent they want to start re-investment and how they're going to run their businesses.

Tom: In the immediate wake of 23rd June clients reacted differently. On the whole businesses wanted to understand exactly what their liquidity position was and where they stood from a risk management standpoint. They're now seeing a new government, they're seeing who's going to be looking after their international trade, who's going to be negotiating with the EU and they are starting to understand how they’ll respond in the post-referendum world.

Thorsten: Given the breadth of customers that we serve, sentiment has differed across that customer base. Some people are clearly very worried about what's happened and continue to be very worried, whereas others see this as a really good opportunity to grow their business.

Tom: I would echo that. Businesses are focused on the immediate issues they face in their market. They are prioritising conversations with their suppliers, with their customers, also conversations around business investment and when the best opportunity is to do that.

Q. How important has it been for businesses that the government appear resolute?

A. Rain: It's been an important signal and removes some uncertainty. One of the things that businesses have been very keen to underline is that there were issues in domestic policy, around infrastructure and skills, for example that needed attention even before we got to the referendum and it’s really important that we don't lose sight of that.

Q. Ahead of the referendum, the CBI created a list of potential implications of a vote to leave the EU, which included job losses and the impact on UK GDP. How likely are we to see those predictions realised?

A. Rain: We have already seen a number of respected forecasters, including the Bank of England, downgrade their expectations for 2016 and 2017. One thing our report highlighted was the impact of a leave vote on trade, which would depend on how successfully we negotiate our tariff-free trade with Europe. It was also designed to show the impact of non-tariff barriers, and the role of that as well as our access to skills and talent. We highlighted these potential impacts; it's now up to policy makers to see how they can mitigate them.

Q. Do you think businesses were scenario-planning for a leave vote?

A. Rain: I think bigger businesses, particularly in the financial sector and those more exposed to financial markets, will have had more concrete scenario plans in place to deal with volatility. Smaller and medium sized businesses don't always have the capacity to do all that scenario planning, and there was also recognition from the business community that if we do leave, we have a period of two to three years where we're in the initial negotiation phase. So they have time to think about what it means for their business.

I also think for a lot of businesses of all sizes there were just too many ‘unknown unknowns’ to make their scenario planning really effective ahead of the vote.

Yuri: We were seeing many businesses, large and small, undertaking some scenario-planning and stress testing. Clearly that’s no small task, given the unknowns.

Q. What are emerging as the key perceived Brexit-related risks?

A. Tom: Our clients tell us that foreign exchange moves are their number one priority from a financial market standpoint. Those who have had robust treasury policies are finding their risk management approach is delivering exactly what it was supposed to deliver, which is not infinite protection, but enough time to be able to put themselves in a strong negotiating position with suppliers and customers.

The other side has been equally interesting, which is those who have not necessarily had a strong risk management strategy, but have found themselves in an environment where sterling is much weaker; particularly some of our importing businesses. Many of these customers are now not just looking at financial market instruments, but also legal and contractual mitigants with their customer and supply base.

Essentially, they want to pass some of the FX moves that work against them down the distribution chain towards their customers. Some are going back to the negotiating table with their supply base and having some tough conversations. They’re looking at the level of malleability there is throughout the entire value chain to mitigate as much risk as possible. At the same time, they’re revisiting their treasury policies to make sure they never get caught out by something like this again.

Yuri: While a lot of people are not thinking about commodities that much right now (because prices are relatively stable), those who do have exposure will find that it increased as the dollar became more expensive. So we'll probably see some businesses realising that risk management policy is about looking at absolutely everything across the board that is relevant to your business.

Tom: In terms of commodities, foreign exchange and interest rates, what is becoming abundantly clear to our clients is who ‘owns’ the exposure. So, for example, a haulage company might think that they have exposure to diesel prices, where in actual fact they have fuel price escalators (as per the contractual mitigants I mentioned), which means they can pass all of those movements onto their clients. So all of a sudden you find it's their customer base that owns the exposure, which is less intuitive.

Yuri: Another issue is around regulations, and the questions as to how the rules of engagement across Europe and with the rest of the world may change.

Thorsten: A lot of people are also keeping a close eye on London property prices - particularly those with pension money invested in property, but also from a business lending perspective, where values are crucially important for access to finance.

Q. What do businesses need to do now to secure a better future?

A. Thorsten: In the short-term, it’s about sticking to your risk management and treasury policies. What we normally say to clients is: understand the levels at which you and your business are comfortable, lock those levels in and stick to them.

Yuri: Business leaders should always be asking themselves – is my strategy for managing risk good enough? Am I prepared for the next big thing?

Tom: From the business standpoint, learn the lessons from this experience and then continue. Stay liquid and manage risk well. Whichever way you look at it, the UK’s economy will likely evolve over the coming years; something for which it has an excellent track record. By staying nimble, innovative and making sure that there are robust processes behind corporate investment, we'll see good, strong businesses do very well.

Rain: We will still see lots of uncertainty in the road ahead and businesses need to be prepared for a bit of a rocky ride. And I think there's always a risk we could see a return of financial market volatility and pressures on the exchange rate in the future.

However, businesses are keen to look forward, not back, and make the most of where we are. We should be looking for the opportunities, rather than dwelling on some of the issues that might stem from a renewed relationship with Europe.

While all reasonable care has been taken to ensure that the information provided is correct, no liability is accepted by Lloyds Bank for any loss or damage caused to any person relying on any statement or omission. This is for information only and should not be relied upon as offering advice for any set of circumstances. Specific advice should always be sought in each instance. The views and opinions set out in this article are those of the author, and do not reflect the views of Lloyds Bank plc nor are they endorsed by Lloyds Bank plc.

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