Un­cer­tainty is big­gest near-term risk for com­pa­nies

Financial Mirror (Cyprus) - - FRONT PAGE -

A de­ci­sion for the UK to exit the Euro­pean Union (Brexit) would re­sult in pro­longed un­cer­tainty and would be credit neg­a­tive for UK-based com­pa­nies such as the auto, man­u­fac­tur­ing, food and bev­er­age, and ser­vice sec­tors, ac­cord­ing Moody’s In­vestors Ser­vice.

Many com­pa­nies would likely curb in­vest­ments un­til the im­pli­ca­tions of a Brexit be­come clear for trade, in­vest­ment, reg­u­la­tions and labour costs.

How­ever, it could take two or more years for the UK to for­mally exit the Treaty on Euro­pean Union, dur­ing which time Moody’s ex­pects that ne­go­ti­a­tions would progress to­wards al­ter­nate agree­ments. This pe­riod would also al­low com­pa­nies some time to adapt to a post-Brexit op­er­at­ing en­vi­ron­ment.

“The big­gest near-term credit risk from a Brexit for com­pa­nies is the un­cer­tainty that would fol­low with re­gards to trad­ing re­la­tions, in­dus­try reg­u­la­tions and labour mo­bil­ity. We ex­pect that some com­pa­nies would curb in­vest­ments un­til there is greater clar­ity in these ar­eas. How­ever, given the po­ten­tial two year time­line for a Brexit to take ef­fect, there is likely to only be a few, if any, near-term rat­ing changes,” said Richard Mo­rawetz, lead au­thor of the Moody’s re­port.

“In the longer-term, rat­ing changes could be more pro­nounced if a Brexit be­came clearly detri­men­tal to trade, in­vest­ment or labour costs, and ul­ti­mately to com­pa­nies’ profitabil­ity,” adds Mo­rawetz. Though con­sid­er­ing the sub­stan­tial trade links that ex­ist, there would be strong in­cen­tives for both the UK and EU to min­imise the ef­fect.

Bar­ring new agree­ments, EU i mport tar­iffs would ap­ply for many UK-based com­pa­nies post-Brexit, such as a 10% tar­iff for cars, which would be rel­e­vant for auto com­pa­nies like Jaguar Land Rover Au­to­mo­tive Plc (Ba2 pos­i­tive) and As­ton Martin hold­ings (UK) Lim­ited (B3 sta­ble). The sup­ply chains of man­u­fac­tur­ing com­pa­nies that im­port from the EU could also be af­fected by any new tar­iff or non­tar­iff bar­ri­ers.

Reg­u­la­tory changes would be sig­nif­i­cant, but could ei­ther be pos­i­tive or neg­a­tive in cer­tain sec­tors where UK reg­u­la­tions are con­fined by EU di­rec­tives that re­quire sig­nif­i­cant in­vest­ment in wa­ter, tele­coms and en­ergy in­fra­struc­ture. For ex­am­ple, in the tele­coms sec­tor the EU agree­ment in June last year to scrap roam­ing charges for trav­ellers in the EU by 2017 would not au­to­mat­i­cally ap­ply in the UK if it voted to leave. Al­though some UK oper­a­tors, like Voda­fone Group Plc (Baa1 sta­ble), have al­ready scrapped the charges.

Any curbs on fu­ture labour mo­bil­ity would af­fect sec­tors with the highest share of for­eign-born work­ers, no­tably food pro­duc­tion, busi­ness ser­vices and re­tail. How­ever, in the case of re­tail, the gov­ern­ment’s in­tro­duc­tion of a higher liv­ing wage through to 2020 could have a greater ef­fect on wages than a Brexit.

The gam­ing and to­bacco sec­tors would face lit­tle im­pact from a Brexit. Taxes on gam­ing are un­likely to be af­fected, while to­bacco com­pa­nies are global play­ers so any fall out would be too lo­calised to af­fect their over­all earn­ings.

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