Country risk: Experts say UK economy will quickly recover from Brexit shock
The UK’s economic and structural ECR scores are holding up well despite the possibility that its people will vote to leave the European Union (EU) next week. The strength of the sovereign’s outlook means that if the UK did vote to leave, it could quickly recover from the ensuing drop in its risk score, claim several experts this week.
By Claudia De Meulemeester
ECR experts are anything but deflated with the idea of the UK leaving the EU
Financial markets have been under pressure in the run-up to the UK’s EU referendum on Thursday as polling ahead of the vote has given no clear indication of whether the British will vote to remain or leave the economic bloc.
Volatility has increased during the past week as several polls have shown a sharp swing towards the campaign to leave the EU.
The 10-year Bund yield fell briefly into negative territory for the first time on Tuesday. Meanwhile, the sterling hit a two-month low against the dollar and was trading at 1.41 as of close of play on Thursday.
However, Euromoney Country Risk experts we spoke to are confident the UK’s economy will remain robust in the event of an exit from the EU.
“The economic attractiveness of Britain will not go down and a trade war with London is in no one’s interest,” says M Nicolas Firzli, director-general of the World Pensions Council (WPC) and advisory board member for the World Bank Global Infrastructure Facility.
The economic assessment of the UK has been hovering around 57 since early 2015.
ECR expert Bruce Morley, lecturer in economics at the University of Bath, goes further to suggest that the long-term benefits to the UK of leaving the Union, such as less regulation and more control over Britain’s trade policy, could outweigh the short-term uncertainty observed in the ECR scores.
While the UK’s economic and structural scores have remained stable despite the looming referendum, the UK’s political assessment score has been suffering for months. It dropped to 79.25 from 79.43 in the last quarter and has been declining since Q4 2015, where it fell to 79.85 from 79.94.
Institutional risk, regulatory environment and government stability are all worsening, according to ECR’s data.
“The disruption would be significant [if the UK voted to leave the EU],” says Constantin Gurdgiev, adjunct professor at Trinity College Dublin.
WPC’s Firzli agrees, adding: “Temporary deterioration in UK country risk metrics has already started and is likely to grow in the short-term as the ‘bad news’ is progressively priced-in by institutional investors.”
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