Crossroads (Toward Philippine economic and social progress)
Philippine Star, 29 June 2016


An event of seismic proportions happened last week that affects a large part of the developed world, in particular, Europe. It is, however, of little significance for us here in the Philippines – at least as far as immediate influences go.

The Brexit vote. The British electorate expressed its preference concerning the question of whether to stay or leave the European Union. In a simple choice between take-it-or-leave-it, 52 percent of voters chose to “Leave,” with 48 percent wanting to “Remain.”

The British electorate had been divided almost halfway. If the British vote had simply chosen “Remain”, then the world’s march toward more international economic integration would have been further strengthened.

What happened, however, was the opposite. By voting for exit, the United Kingdom unsettled the world’s comfort zone regarding global integration and freer trade. Exit from the European Union means wanting out, a rejection of the rules and objectives of that union.

When a member wants to secede, the proper stance of the affected union would be to isolate the case and to prevent other members from following suit, thereby preventing break-up. From this viewpoint, the reaction of the European Union for Britain to speed up the exit process is aimed at helping it strengthen its external defenses from any other efforts by any other members to secede.

The reaction of financial, commodity and stock markets on the Brexit was swift and telling – large swings in prices that forebodes poor prospects on Britain’s economic future. This was as expected. Institutional and friendly advice had been made by key allies (the US, for instance, and also its European partners) and the International Monetary Fund had warned of this, a weakening of its influence and future prospects.

Thus, the immediate market reactions expressed their uncertainties. Disengagement of both Britain from the larger European Union becomes uncharted territory and poses great danger for both concerned parties.

It will take time for definite and appropriate actions to take place. The process of exit by a member is well-defined in Article 50 of the Treaty of Membership. It has to be invoked by the member that is quitting and a two-year limit on the negotiations would have to be settled.

The future of Britain. Politically, the immediate fallout of the Brexit vote is the resignation of Prime Minister David Cameron of the Conservative Party shortly after the results were announced. It was Cameron who had pushed the referendum in order to seek a strong mandate, only to be defeated. This was the start of the political nightmare.

Secondly, this puts the foundations of the British state in wobbly condition. Scotland and Northern Island had voted to remain in contrast to the will of the larger electorate. The result has instilled separatist factions in pursuing their political agenda. Thus, the vote itself endangered the foundations of the United Kingdom as a nation.

One tweet in social media exceptionally captured this mood: “the net present value of Britain is plummeting.” This is meant to say that the total sum of future expectations about the British economy had declined. It could presage a poorer place in the world for the once mighty economy.

In particular, during a two-day period immediately after Brexit, the British pound fell to $1.32, the lowest it has been since three decades ago. British and European stocks have fallen hard in values, especially British. (British banks have lost a third of their values.)

The impact on foreign markets have also been deep. The Dow fell more than 850 points in two days. Japan’s and Asian equities have also fallen hard.

The most important indicator of the future consequence for Britain is the decision of Standard and Poor to reduce the credit rating of UK sovereign debt from triple A to “AA.” Likely, other credit rating agencies will follow. These have immediate consequences to Britain’s output and investments going forward.

These uncertainties are likely to continue until the process for the actual withdrawal has been fully defined, and this cannot be known fully until the UK files for the Article 50 withdrawal which requires action by the European Union.

Until that time, for the whole of Europe, the potential march of the European Union toward greater unity is held suspect. There might be new centers of mistrust and secession from the union, as a result of the infections fed by the British action.

For the United Kingdom, the consequences could even be worse. What if the losses she incurs are much more than the gains she will make by going it alone in the world, like Switzerland, for instance? Britain, of course, has its many economic alliances with the larger community of the world, but it could forego some major benefits from being part of a stronger Europe.

What if the United Kingdom were forced to break up with Scotland and Northern Island, which are seeking disengagement from it? These are costly, beyond repair, and could spell out once mighty Britain’s further diminution in the world.

Impact on the Philippines: minor. To the Philippines, this development has minor direct repercussions. Strong macro-fundamentals have insulated the country from these international swings in prices. And we are on a course of unique forward motion.

Moreover, historically, our economic ties with Britain and with the European Union are less close than those we have with the economies of the US, China and Japan. We are linked more with Britain and Europe through our economic ties in the ASEAN region.

There is less direct cause for adverse impact. An indicative proof of this is that the Philippine stock market did not move as drastically as those of other Asian markets as a result of Brexit. In fact, if the Philippine capital market is seen as a potential beneficiary of investment flows seeking safe-haven, how do we explain the gains in the PSE index of 1.5% on the Monday after Brexit?

Such optimism cannot be sustained, however, if on account of Brexit the world’s economy is induced into a recession. So far, that is remote, but it is not entirely out of the picture. This is unlikely.

However, the world economy is not robust at the moment. The recovery from the 2008 recession has not been strong, despite the fact that the US economy at least is on course in that recovery.