Can your business navigate Brexit?

Uncertainty continues to dominate the Brexit situation. What happens now, after the Brexit vote and the implications for businesses and organisations in the UK, as well as Maltese and EU companies that trade or carry out transactions with the UK, is still

Dr Mallia is Grant Thornton Partner, Business and EU Advisory

The only certainty that does exist is that once the UK formally triggers Article 50 of the EU Treaty, there is a time window of maximum two years within which to negotiate a divorce from the Union while at the same time broker a trade deal (covering goods and services). Technically speaking, the negotiations for a new trade deal could actually take longer than two years as Article 50 only relates to leaving the EU and not to negotiating new deals, although it is clear that one is explicitly linked to the other.

The UK has moved faster than originally expected to appoint a new Prime Minister and this will help reduce the situation of uncertainty that still dominates. Following the Brexit vote the initial debate within the ‘Brussels bubble’ was whether the UK would actually leave. UK Prime Minister Theresa May immediately put an end to that debate by stating unequivocally that “Brexit means Brexit”.

The EU has also responded albeit in a somewhat different fashion. The initial reactions of “the UK must quickly trigger Article 50” have now given way to a more measured response of “the UK must be given some time to put its house in order before triggering Article 50”. Commission President Junker has now appointed (some say somewhat diabolically) the former French Commissioner Michel Barnier. Barnier has been described as “hardly a soul mate of Britain” and was once dubbed by the Daily Telegraph as “the most dangerous man in Europe”.

While at the moment there is no actual upheaval of rules and regulations within the UK, it is clear that change is well on the horizon. Given the current scenario of volatility and lack of a clear way forward, it is clear that private enterprise must start to seriously assess the possible implications of Brexit on their current business model. In doing so they cannot start by examining the business dynamics of the sector they are operating in. Rather they must start by understanding the framework within which any trade deal between the EU and the UK will be negotiated. It is vital to understand and then keep track of how this framework is developing as this will give a clear indication as to where the negotiations are heading. Will it be an effort from both sides to preserve as much of the status quo as possible or will it be the case of the Commission and the remaining member states trying to show that it does not pay to leave the EU and will therefore give the UK a poor deal?

What is certain is that based on the extensive commercial ties between Malta and the UK, we are possibly among the most exposed member states. In fact, the Brexit Sensitivity Index issued by Standard & Poor’s ranks Malta in second place out of the 20 countries most exposed to the impacts of Brexit. Malta, Ireland, Luxembourg and Cyprus are all ranked as the most vulnerable with only Switzerland and Canada being non-EU. This drives home in a most unequivocal manner that the Maltese business community cannot be complacent in the face of such turmoil. Of course the impacts of Brexit will vary from sector to sector as will the opportunities that might possibly arise.

In Malta, the initial focus has primarily been centred on the tourism sector and the financial services sector, two main pillars of the Maltese economy with extensive links (direct and indirect) to the UK market. Grant Thornton believes that both these sectors could be impacted in a severe way if negotiations go pear-shaped for the UK. On the other hand, not much would change if the current rules and regulations are kept by the UK as part of its new deal with Europe. With tourism it will be macro factors such as the general health of the UK economy and the strength of the Sterling which could impact significantly, while with the financial services the issue of maintaining passporting rights will be the key issue.

There are however numerous enterprises operating in other sectors of the Maltese economy (for example in the manufacturing sector) that are heavily linked to the UK market. Those companies that depend on tariff free access to the UK market will have some serious thinking to do while companies forming part of larger conglomerates based in the UK may have the opportunity to provide vital access to the EU Single Market.

When thinking about the impact on your businesses, you will want to consider not only legal and regulatory changes but also market reactions, consumer and business behaviours and the wider political and economic environment. What is certain is that this is no time for complacency and that we should use all the time we have to 1) keep a close eye on the day to day developments as they happen, and 2) develop contingencies in case the worst case scenario starts to unfold.