What will Brexit mean for emerging markets?

The ‘unexpected’ Brexit vote brought renewed volatility to global financial markets, with Asia being no exception. In addition to equities, currencies in Asia also took a hit as a result of the rising US dollar.

However, despite the chaos in the immediate aftermath of the referendum, Brexit remains primarily a political rather than an economic crisis. The view of The Conference Board’s economics team is that the direct growth impact on emerging markets from Brexit is likely to be marginal when compared to mature economies such as Europe, the US and Japan. Most emerging economies’ trade and investment are widely diversified, and their exposure to the UK is relatively limited compared to mature economies: exports to the United Kingdom account for less than 1% of emerging Asia’s GDP.

In the short term, once the market panic abates, the Conference Board does not expect Brexit to shake up the economic fundamentals of emerging Asia and emerging market economies in the rest of 2016. However, volatility in global financial markets is likely to stay over the coming months, and global investors’ risk aversion will continue. The ongoing financial market volatility will also complicate emerging markets’ policy making in central banks, which can impact businesses through changes in interest rates and local currency value.

The longer term political and economic consequences of Brexit and its secondary impact on emerging markets are harder to predict but may be substantial. The potential impact will likely come from trade and foreign direct investment, and a possible reversal of globalisation. This could be particularly dangerous for export-driven Southeast Asian economies. Additionally, as reported by Oxford Analytica, UK development assistance funds for programs in Southeast Asia may be at risk. Nevertheless, Brexit is still in its initial stage, and the UK has two years to negotiate its way out of the European Union.

In summary, the view of The Conference Board’s economics team is that the sky is not falling, at least not immediately. However, great uncertainty looms ahead. Businesses should not panic or jump to conclusions. Instead, our recommendation is that companies operating in emerging markets should plan their strategies around the different possible outcomes of the UK Brexit negotiation process in the next two years.

Published by The Conference Board, a global, independent business membership and research association. Their mission is to provide the world’s leading organisations with the practical knowledge they need to improve their performance and better serve society. The Conference Board is a non-advocacy and not-for-profit entity.

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