Tuesday, 28 June 2016

The Dawn of Something Awesome

Post-Brexit UK – A New Dawn for ASEAN

The political and economic fundamentals of the United Kingdom (UK) remain very strong even as madness and mayhem descend upon global financial markets after the Brexit voted 52%-48% in favour of the UK leaving the European Union (EU) in 2 years time.

That the UK has never been truly and fully an integrated part of the EU seem to be lost on the major market players as they allow their fears and ignorance to fuel massive sell-down of stocks regardless of their materiality and relevance to UK and/or EU economies.  Global financial markets protested as they are unable to grasp the inevitability of the emergence of an unfamiliar new world order having a independent, politically and economically strong UK unhinged from the EU. 

The resulting chaos and havoc wiped out more than US$2 Trillion in stock value across various stock exchanges and markets.  And an unprecedented and mysterious 8% fall in the fundamentally strong sterling pound UK£ against the cheapening US$ whose real value is in constant decline due to the weekly printing of US$billions by the US Federal Reserve.  

Even the rating agencies – Moody, S&P and Fitch - rushes to cut the UK’s credit rating outlook to “negative” from its 2nd higher “Aa1” status, claiming without any evidential information or analytic support that her independence from the EU’s infamous and costly bureaucratic business rule-book would have “negative implications for the UK’s medium-term growth outlook”.  Moody also lowered the UK’s creditor and debt ratings to “negative” from “stable”, again without providing any objective rationale.

And yes, this is the same Moody rating agency who, together with S&P and Fitch, was blamed for providing top Triple A ratings to junk bonds and sub-prime scams leading to the 2007 financial meltdown.

The UK economy is 4% of the world’s GDP; and at nearly US$3 Trillion is the 9th largest in the world and the 2nd largest in the EU.  With a reducing national budget deficit, the UK has been the fastest growing among the developed nations, being the 9th largest exporter and the 5th largest importer with the world, including the EU. 

In terms of foreign direct investments (FDI), the UK has the 3rd largest stock (behind USA and China) of inward FDI worth US$1.7 Trillion as well as the 2nd largest stock of outward FDI, of which a significant 28% (about US$35Billion) flows into the EU.   

Hysterical pundits pronouncing the decline and end of the UK economy should do their homework and re-fresh on the fundamentals of strong economics.  Given the fact of a clumsy, burdensome and declining EU, it further defies intelligent rational analysis for financial markets to dive into pandemonic chaos immediately post-Brexit voting.

In recent years, the UK has become the 2nd largest net contributor, after Germany, to the EU budget.  UK’s annual EU membership fee is around UK£12.9 Billion, or usually estimated at about UK£350 Million PER WEEK before her rebate, or net about UK£250 Million PER WEEK with the rebateThis is immediate savings once the UK is formally out of the EU, and can be diverted to domestic use or FDI into other countries eg ASEAN, Commonwealth, Africa and USA.

The grandiose EU dream has become nightmarish over the years. The peace and prosperity envisioned at its creation are mired in despair, unemployment, debts and fiscal disarray.   EU’s share of the world GDP has fallen in the past 40 years from 37% in 1973 to less than 23% today, and still declining.  EU unemployment remains high when compared with UK’s 7.5%, with countries like Spain at 23% and Greece above 25%.  The relentless economic EU economic and political crisis has no solution because it is grounded in the very conceptual nature of a “United European” notion that forces a grouping of 28 nations with very disparate economies and fiscal discipline, resulting thereby in endemic economic paralysis and stunted development.

Without the UK, the EU must cut its budget correspondingly by 10%.  This is believed to be impossibly tough in view of tough widespread wasteful spending and corruption.  As pointed out in Brexit Part 1: Whither the Gloom and Doom for UK?, the EU exit terms and conditions are expected to be fair and favourable to the UK since her loss to the larger EU community is much greater than her substantial economic and political contributions to the EU bloc.

Post-Brexit UK is finally freed of EU ideological, economic and political shackles to pursue her own destiny and dreams. Brexit opens up tremendous opportunities for the UK to expand its own trade with current trading partners like ASEAN, Commonwealth, Africa and the USA.  And to create alliances with other trading blocs eg the Trans-Pacific Partnership (TPP) around the Pacific Rim, the Regional Comprehensive Economic Partnership (RCEP) and the emergent ASEAN Economic Community (AEC) without having to obtain EU approval.

ASEAN is an economic community of 10 South-East Asian nations with a combined GDP of US$2.4 Trillion and 630 million people.  For ASEAN, the UK is a main export and FDI destination in Europe.  ASEAN also receive significant FDI from the UK. The UK-ASEAN relationship can be expected to deepen and expand in volume and financially post-Brexit. 

As a start, a UK-ASEAN Free Trade Agreement (UKAFTA) would make logical sense and easiest to model after the proposed EU-ASEAN FTA currently under negotiation.  Alternatively, individual ASEAN nations could fashion their own respective FTA with the UK, using the 2015 EU-Singapore FTA (EUSFTA) as a template model.  Individual UK-ASEAN Member FTAs would not jeopardize the eventual conclusion of a EU-ASEAN FTA.  There are multi-billion dollar infrastructural projects in ASEAN awaiting FDI and investments from the UK, EU and the rest of the world.

Post-Brexit UK is a strong competitor of the EU and other developed nations in the global FDI and trade space.  ASEAN sits at the heart of two high-profile mega-FTAs: the TPP and the RCEP between ASEAN and its six FTA partners, including China, Japan and India. These two giant trade initiatives will inevitably draw ever more economic activities and FDI to the region and away from the transatlantic trading area, to the detriment of the EU.

The continuing turmoil in the financial markets post-Brexit ignore the solid inherent strengths of the UK economiy and her financial institutions.  Her political stability is not weakened by the Brexit vote, but is instead strengthened by the boldness and courage of her political leaders from all political persuasions to trust in the judgment of the UK people.  The doomsayers and gloomy outlooks for post-Brexit UK have no objective basis and are grounded in their fears of the unknown dynamics of a EU without the UK. 

The UK is also the peer leader of the Commonwealth, a huge loosely-organised bloc of 53 countries with a combined GDP of over US$9 Trillion, of which 78% of which is accounted for by the four largest economies: UK (US$2.95 Trillion), India (US$2.05 Trillion), Canada (US$1.79 Trillion), and Australia (US$1.44 Trillion). 

 And when the economic radarscope of the UK scans more wider globally, the Commonwealth and ASEAN will become her new prosperity platforms as the UK re-kindles old relations in the dawn of a new global order now unfolding and unpacking before us in an uncharacteristic but certain manner.    


Saturday, 25 June 2016

The End of Something Not Good

Whither The Gloom and Doom for Post-Brexit UK?

Conventional wisdom failed; and the proverbial perfect storm brews in the financial market teacups. The globalscape of economic and trade is beginning to shift, gradually and forever.    

And so the United Kingdom (UK) begins her lone, political and largely psychological, journey out of Europe through a Brexit referendum vote of 52%-48% on Thursday, 23 June 2016, in favour to leave the European Union (EU); which, truth be told, the UK has never been wholly integrated into.  

Gone are the grandiose, delusional and oft-times, nightmarish, dreams of European unity originated in the 15th century and which gathered momentum at the end of the 2nd World War.  In 1972, the UK eventually joined the European Economic Community (EEC) by becoming part of the 1957 Treaty of Rome which established the EEC with the goal of a free trade area with a common tariff.  After a series of related and developmental Treaties, the European Union was formed out of most members of the EEC in 2009. 

The initial gloom and doom predictions for UK in the wake of the Brexit vote are largely misconceived and the doom pundits ignore the fact that the UK has been very much a “reluctant” (EEC and) EU member who was courted with special terms and conditions to become “more European”. 

The UK was allowed to keep her own currency, the British Pound, instead of merging it with the common European currency, the Euro. The British Pound therefore enjoys an independent exchange rate with the EU as well as other trading partners without being unduly impacted by the economic policy vagaries of many EC countries eg. France, Germany, Greece, Italy … etc.  EU currency and financial regulations have no effect on the UK’s own independent policies and measures.  

The ensuing financial markets volatility lacks compelling fundamental causes and makes very little logical sense since the Brexit votes did not change any factors affecting the volumes of trade, which is governed by contracts, and short-term investments, whose prospects and profitability are not suddenly impacted by the votes.  Yet, the British Pound lost 8% against the US Dollar within just 40 hours, as financial players shed sterling pound (why?) for the US greenback (seriously?). 

Never mind the simple economic truths: That 44% of UK exports goes to the EU, and which also accounts for 53% of UK imports. UK exports to the EU sustain about 10% of the UK workforce (about 3 million workers).  In contrast, EU exports to the UK provide more than 8 millions EU jobs.  Economists should also know that these would not change significantly in the coming years to justify the drastic shifts in the currency exchange rates that the market players have incited and instigated.

UK-EU trade is expected to continue and even improve since the UK is a major key export destination of many EU countries. Post-Brexit UK may face some new rules with some EU countries but these are likely to be mitigated by their legacy mutuality of benefits (see pix below).  

We see once again the stroking of fears by short-term profiteers and speculators.  The explosion of fears and greed for speculative profits exaggerate and inject unfounded and imagined uncertainties to create profiteering opportunities for the smarter market players by fueling short-selling as they await the long-game victories that begin immediate in the next and following weeks.

The administration of UK laws is also not governed by EC legislation, legal systems and jurisdiction.  For example, the European Court of Justice has no power over British Courts of Law. 

The UK enjoys many exemptions from EU rules which must be complied by other EU members.  For example, EU passports have to be produced when entering the UK; unlike the convenience of free travel without need to show EU passports when entering other EU countries.
EU annual membership fee costs the UK 12.9 Billion British Pounds (after the rebates agreed in 1984 from the full UK 17.8 Billion British Pounds).  This includes UK contributions to other EU Institutions.  British farmers, researchers and other beneficiaries received back about UK 6 Billion British Pounds.

What the pundits of Brexit gloom and doom did not want the rest of us to know is that the UK would save at least 350 Million British Pounds per Week once the UK is out of the EU. 

It is also estimated that compliance with the massive 170,000 page of the Top 100 EU rules, directives and regulations cost UK businesses an annual 33.3 Billion British Pounds.

The UK is the top recipient of Fixed Direct Investments (FDI) among the EU countries.  In turn, she is also a major FDI contributor to many EU countries. Its proximity to the EU remains a core competitive advantage, which is further enhanced by her relative political and security stability as compared with other EU countries. Most of her other major investment partners are however not from the EU.  

The truth is the EU needs the UK much more in many ways beyond financial contributions. Post-Brexit EU is clearly much poorer financially and materially, as well as much weaker structurally with lesser strategic resources in terms of global leadership influence and prestige.  The EU exit terms for a Post-Brexit UK are therefore expected to be quite favourable for the UK.

There is no rational basis for any gloom and doom predictions for the future of a Post-Brexit UK. Market volatility following the Brexit vote is man-made, and the more powerful men (and women) in the financial markets have a greater hand in provoking and fomenting it.

Post-Brexit UK is finally freed of EU ideological, economic and political shackles to pursue her own destiny and dreams (see Churchill's quote below from the Saturday Evening Post, 15 Feb 1930).  It is timely for the UK to reverse its 1968 “East of Suez” decision to retreat from its imperial power bases from the Gulf to the Far East, and replace it with an updated non-imperial engagement plan with equal partners in the British Commonwealth that focus on all the common issues of global concerns.

Like a Japanese “ronin” samurai without a “master”-brand to associate and anchor her affiliation, post-Brexit UK as a major political and economic player must now roam the world stage in search of a “uniquely significant and influential” global platform to re-define and re-calibrate her relationships with the global community in all the emergent issues of trade, economics, terrorism, security, immigration, climate change and sustainable development.