Brexit tumult

Posted on August 25, 2016 · Posted in Accounting & Business

Few events other than war have had such profound and far reaching consequences as the UK’s Brexit vote.  The British prime minister has been replaced, the value of the pound has fallen and the market value of some banks in the UK, Ireland and elsewhere has plummeted.  Moreover, the IMF warns the decision “could dampen growth” in the UK, the eurozone and globally, while the European Commission concedes that Brexit-related uncertainty “could weigh on the medium-term growth prospects” of the eurozone.

 

Northern Ireland stands to lose more than any other UK region as a consequence of the Leave vote.  Its new finance minister, Máirtín Ó Muilleoir, has met with counterparts in Scotland and Wales to formulate a common strategy and has also met with ministers and officials in Dublin to seek a joint approach to Brexit negotiations.

 

The weak pound has had multiple impacts.  There has been a rise in cross-border shoppers travelling from south to north; inflation is expected to rise in Northern Ireland from the higher cost of imported goods and foreign holidays; but northern exporters immediately exploited their lower cost proposition.

 

In an initial response to the Brexit decision, the now sacked Chancellor of the Exchequer George Osborne announced his intention to cut UK corporation tax rates to “less than 15%” from the current 20%.  This would have had the effect of narrowing the gap between the UK and Irish tax rates and also undermined the agreed Northern Irish policy of adopting a 12.5% rate from 2018.  Incoming Chancellor Philip Hammond has distanced himself from the proposal and a clearer indication of UK tax policy will probably have to wait until the Chancellor’s Autumn Statement.

 

Some investors responded quickly to the Brexit decision, reversing decisions to commit money to new projects in Northern Ireland.  A planned conference of US investors to take place in Belfast and Derry in October has been postponed until at least next year.  But some investors may be turning to the Republic, with several banks considering relocating operations from London to Ireland.  Irish government officials and the IDA are reportedly lobbying hard for international banks to relocate centres not only to Dublin, but also to Galway and Limerick.

 

Despite this, the Irish government is concerned at the possible damage of Brexit to the economies in both the North and the Republic.  Enda Kenny indicated that his government had (unlike the UK government, it would seem) a ‘Contingency Framework’ for a Brexit vote.  “The Contingency Framework is being co-ordinated by the Department of the Taoiseach,” explained Kenny. “It is based on preparations over many months, including inputs by government departments to identify the key strategic and sectoral issues arising from the UK disengaging with the EU.”

 

Priority issues in the Contingency Framework include UK-EU negotiations, British-Irish relations, Northern Ireland, trade, investment, North-South border impacts, competitiveness, macro–economic issues, research and innovation funding and energy.  In a phone call to the Taoiseach, outgoing Prime Minister David Cameron promised Kenny that the UK government was committed to ensuring early bilateral engagement at senior official level on Northern Ireland, the border and the common travel area.

 

The reaction was different in the north, where First Minister Arlene Foster had been a Leave campaigner.  Her first statement after the vote stressed the importance of policy continuity in the short-term and that citizens from other EU countries can be assured “that we value and recognise the contribution that they make to our society”.  She added: “The priority of the Executive will be to ensure Northern Ireland’s interests are protected and advanced and that new opportunities are developed as part of any new arrangements within the UK and the Republic of Ireland as well as with our European neighbours.  We will seek to work with Executive colleagues to plan for the new realities and to maximise the benefits to Northern Ireland of this changed situation.”

 

Teams of senior officials have been established within Northern Ireland’s government departments for engagement with Brexit negotiations, with responsibility to identify future challenges and opportunities.  The First Minister explained that she did not expect Brexit to damage its proposition to investors, who were typically attracted by a low cost base for doing business either with the rest of the UK, or else to support operations within the US.  “If you consider the list of FDI successes over the past five years – Allstate, Concentrix, Alexander Mann, Deloitte, PWC, EY, CME, WhiteHat, Capita, Cayan, Baker McKenzie, Allen & Overy, Herbert Smith Freehills, Concentrix, Teleperformance, etc – all of these are servicing either USA or UK,” she stressed.

 

A similar point was made by Alastair Hamilton, chief executive of Invest Northern Ireland.  “All of the factors which have made Northern Ireland a good place to start and grow a business, including our attractiveness as a location for investment, a base for research and development and as a trading partner, remain and will continue to provide the foundations upon which to grow our economy in the future,” he said.

 

Business organisations have been less sanguine.  A joint statement from CBI Northern Ireland, Ibec and the Irish Congress of Trade Unions called for an urgent economic stimulus through the swift approval of €80m of EU funding of Peace IV and Interreg schemes that are currently under consideration.  “If delivered, the funds can significantly boost employment and business prospects in [Northern Ireland, the Republic and Scotland]”, said the three organisations.

 

Wilfred Mitchell, Northern Ireland policy chair for the Federation of Small Businesses, urged political leaders to provide clarity over access to the single market and the free movement of people.  He explained: “Clarifying the issues around Northern Ireland’s unique position, as the only part of the UK to share a land border with another EU state, now move from theoretical to reality and we need to remove the uncertainty that this unresolved question has now brought.”

 

Brendan Jennings, managing partner at Deloitte Ireland, argued that while there is now a climate of uncertainty, it is essential for Irish businesses to remember that it will take two years for the UK to leave the EU – after it has given notice of doing so.  “Irish businesses have time to prepare and adapt,” he said. “Businesses adapt to changing circumstances all the time and markets will adjust and settle.

 

“What is essential right now is for Irish businesses to immediately set about identifying any impacts and prepare plans to manage those impacts. Our focus will be to work with our clients to help them to prepare for any negative impact, but also to identify opportunities which this changing environment will provide.”

 

Feargal O’Rourke, PwC Ireland’s managing partner, adopted a similarly pragmatic tone.  “In the light of Brexit it will be important that we align ourselves to the potential opportunities that present themselves,” he said.  “However, there are certain areas for review to ensure we can fully capitalise on our foreign direct investment potential.

 

“I would encourage all companies to undertake full-scale scenario planning for Brexit covering both the short and long term risks.  This should include, where relevant, considering product and market diversification and innovation.  Now is also a time that the benefits of technology and digital will pay you dividends more than ever.”