How Does Brexit affect Malaysians?


With the sterling falling and Malaysia’s direct investments in the UK rising, what does Britain’s vote to leave the EU potentially mean for us?

The UK defied expectations from opinion polls and bookmakers, and voted to leave the European Union (EU). Apart from the inevitable plunge of the British pound and the drop in appetite for risk assets, we highlight the economic implications of this event for Penang and Malaysia in four areas.

First, the UK economy is likely to head into a short-term recession due to the loss in confidence and the uncertainty surrounding the process of exiting. UK consumers are likely to increase precautionary savings, which will hurt high-end services and durable goods purchases. The GBP’s drop will help offset the damage, and the Bank of England is set to cut interest rates in July or August to provide support, but the UK’s economy as a whole is likely to suffer shock.

How will this affect Malaysia? For starters, bilateral trade between Malaysia and the UK has not been large recently. According to the Department of Statistics, exports to the UK range between RM10.5bil (2004) to RM9.3bil (2015), while imports from the UK range between RM6.6bil (2004) to RM7.1bil (2015). Thus, a trade balance of RM3.9bil (2004) to RM2.2bil (2015) has been in Malaysia’s favour. Collectively, the UK’s trade with Malaysia ranges between 3.6% and 8.8% of Malaysia’s total trade.

For Penang in the year up to November 2014, exports to the UK was RM156mil versus imports of RM88mil, generating a positive balance of trade of RM68mil in Penang’s favour. Therefore, while the UK is an important trading partner, it is not the dominant one.

Trade impact on Malaysia and Penang is likely to come from spillovers from reduced trade with the EU. Nonetheless, the damage to the European economy seems manageable considering that growth has been comfortably above trend for the year or so, as shown by the steady drop in the unemployment rate. Similarly, threats to the European financial system are limited due to years of tight regulations and rising capital buffers.

Besides, inward foreign direct investments (FDI) from the UK in the manufacturing sector in Malaysia have not been extensive. For example, according to the Malaysian Investment Development Authority (Mida), FDI from the UK into Penang was only RM389,280 out of RM5.1bil in 2014. Likewise, FDI into Malaysia was between RM15.4bil (2008) to RM20bil (2014). This amounts to 4.2% to 6.1% of Malaysia’s total FDI.

However, Malaysia’s direct investment in the UK is higher and has been rising steadily since 2008. For example, direct investment in the UK was RM8.2bil (2008) and has risen to RM21.3bil (2014). Malaysia’s direct investment has also generated publicity, in particular in the properties sector. For example, SP Setia and the Employees Provident Fund have been leading a multi-billion pound redevelopment of the Battersea Power Station in London.

Therefore, the trade and investment impact to Penang and Malaysia from Brexit is likely to be indirect, via the fall in confidence in the global economy which affects crude oil prices and appetite for risk assets such as Malaysian equities and bonds.

Second, the impact on Malaysian households should be generally positive. For most Malaysians, a holiday to the UK will be more affordable. However, due to strong education and investment links (as we have seen in the popularity of the Battersea Power Station redevelopment among Malaysian households), some households and institutions will be affected through the fall in GBP. There are thousands of Malaysians studying in the UK; hence, a weaker GBP will lower their education costs.

Third, several government-linked investment companies have invested in the UK – predominantly in London properties. With the desirability of London as an international city potentially affected by Brexit, there is a risk of property prices falling. Therefore, the impact on these institutions may be compounded because in addition to GBP depreciation, the underlying asset value may fall.

For example, the EPF has direct investment in commercial properties in the UK such as 40 Portman Square, London and Reading International Business Park (EPF Annual Report 2015). Taking the cue from some UK property funds that have cut valuation by as much as 17% (e.g. Aberdeen UK Property Fund) and suspended redemption, there is likely to be valuation cuts in the EPF’s commercial properties.

Anti-Brexit march in London in June.

However, as highlighted in the first quarter 2016 investment update, the EPF’s total property exposure is relatively small – at less than four per cent, so any fall is unlikely to have a material impact. In fact, given that the EPF’s goal is for inflation-linked assets to reach about 10% of the total fund size in five to seven years, GBP depreciation and fall in property value may present opportunities.

Lastly, Brexit has broader political and strategic implications, with the most obvious being the European project and the rise in nationalist sentiment among some EU members. Elections in the Netherlands (March), France (April/May) and Germany (October) in 2017 mean that political risk will never be out of the spotlight, especially with Brexit negotiations in the background. However, exit will be much more complicated for those that are members of the Eurozone versus the UK. For Malaysia, this may have an impact on the negotiations of the ASEAN-EU free trade agreement.

While the results might not be immediate, if the UK fares well outside the EU then other countries may be tempted to follow. This will create lingering uncertainty globally. It is difficult to imagine European integration moving forward in the current environment. This will have implications on the single currency, where a monetary union without a fiscal union carries its own issues.

The problem can be lessened if Germany is prepared to reflate its economy and reduce its huge external surplus, but this seems unlikely and is difficult under the country’s current budget rules. As a result, the onus will be on central banks throughout the world to continue to supply liquidity to keep the economy going. Therefore, actual or rumoured changes in interest rates are likely to increase volatility and affect Malaysia.

In conclusion, the economic consequences of Brexit are likely to be indirect through aversion to risk assets or reduction in confidence. At the same time, the depreciation of GBP may affect Malaysian investors in the UK. The wider impact is likely to be on the political aspect of the EU project and the underlying reasons for Brexit – one of which is the widening social divide between the rich and the poor.

Lim Kim-Hwa, PhD, is CEO and head of Economics at Penang Institute, fellow in Finance and Financial Reporting at University of Cambridge and associate chartered accountant of the Institute of Chartered Accountants in England and Wales.

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