Brexit Risk: Which Economies Are Exposed?
by Roubini Econoteam
Much of the current debate over the impact of “Brexit” centers on whether pulling out of the EU would be a good or bad move for the UK. Here, we consider the flipside: Which economies would likely experience a shock (positive or negative) in a post-Brexit world?
Mapping Exposure to the UK
Using our systematic model, we have constructed two indicators to assess the extent of countries’ trade and financial linkages with the UK, evaluating over 100 countries.
The first indicator gauges trade exposure, measuring a country’s exports to and imports from the UK as a share of GDP and total trade; the second looks at financial linkages, considering the size of a country’s portfolio investment in the UK (as a percentage of GDP and total portfolio investment), foreign direct investment (FDI) position (as a share of GDP) and bank claims (as a share of GDP and total claims).
Both indicators are the simple average of their subcomponents. Combining these two measures, we gauge countries’ varying degrees of exposures to the UK, with high exposure levels potentially implying vulnerability in the event of Brexit.
The indicators are designed to provide a consistent and systematic tool for evaluating countries’ interconnectedness with the UK in the trade and financial spheres, not to assess the impact of Brexit on individual countries.
The exact impact of the process will be intrinsically non-linear and therefore dependent on the evolution of events (for example, Scotland calling for a new independence referendum).
European Countries: Higher Integration, Higher Exposure
Among European countries, we see Ireland, the Netherlands, Switzerland, Cyprus, Luxemburg, Norway and Belgium as the countries most exposed to the UK. Assuming lengthy renegotiations of trade and financial links (which could take years) as a result of Brexit, these countries stand to be most affected.
Ireland, the Netherlands, Norway, Belgium and Switzerland, have a high exposure via trade. For the first four of these, exports to the UK account for a high share of total exports (13%, 11%, 19% and 9%, respectively) and a high share of their GDP (8% for Ireland; 6% for Belgium and the Netherlands).
Switzerland and Ireland are exposed through the import channel as imports from the UK account for 12% and 32% of total imports and 5% and 9% of GDP, respectively. Regarding the financial sector, Luxemburg and Ireland stand out for both high portfolio and FDI investment in the UK. German, Irish and Swiss banks also have a significant amount of claims in the UK.
Brexit would require the UK to renegotiate its terms of access to the EU’s single market; with the EU accounting for almost half of UK trade (goods and services), post-Brexit uncertainty would hurt a number of sectors, even assuming continued access to the single market.
For European countries, those with most trade exposure, such as Ireland, the Netherlands, Norway and Belgium would also suffer. The impact on the financial sector remains unclear, but the general uncertainty would likely depress earnings.
Non-European Countries: Brexit Might Represent More Trade Agreements Outside EU
Among non-European countries, Hong Kong and South Africa have the strongest financial links with the UK, which accounts for a high share of each economy’s portfolio investment. Bangladesh and Turkey rely on the UK as a key overseas market (it absorbs 9.5% and 8% of their total exports, respectively).
Weaker UK demand could reinforce Turkey’s export weakness (the country is already suffering from declining trade with Russia, Iraq and the broader Middle East).
It is uncertain whether Brexit would be beneficial for these countries or not, as bilateral agreements with the UK could be negotiated more quickly as the risk of national vetoes would be lower. The UK would likely look for closer ties with non-EU trade partners to compensate for a decline in trade with the EU