Limited Brexit's direct impact to Asia Pacific: S&P

"Whether we get any measurable real impacts from Brexit depends on a couple of things. One, on how long the market volatility lasts, and whether it begins to spill over to the real economy. And two, whether we get any political aftershocks, including EU exit/entry votes, from other European markets," said S&P Global Ratings' Asia-Pacific chief economist Paul Gruenwald.

Brexit is expected to be challenging but is not likely to have widespread near-term negative rating consequences for home-grown Asia-Pacific banks and other financial institutions. Although, it's still early days as the geopolitical ramifications of Brexit are yet to fully play out. The direct exposures of most Asia-Pacific financial institutions to the UK appear to be manageable at current rating levels.

Generally, our S&P Global Ratings' portfolio of rated corporates in 

Asia-Pacific has limited exposure to the UK market, except for CK Hutchison Holdings Ltd. group, Tata Motors Ltd., and Tata Steel Ltd. The rating impact on these companies will likely be neutral to somewhat negative if there is a sustained weakness in economic output and heightened risk aversion. 

"The Japanese yen's status as a safe-haven currency could lift its value, which will likely have a direct negative impact on the overall earnings of companies with net export exposures," said S&P Global Ratings credit analyst Terry Chan. "For Australian corporates, currency volatility will have only marginal impact. That's because most borrowers maintain a high level of currency hedging for non-Australian-dollar denominated debt and/or have protection through non-Australian dollar cash flows for offshore operations."

UK insurers with operations in Asia-Pacific are likely to face some impact. The region's insurers, on the other hand, have limited business operations in the UK, with the exception of QBE Insurance Group Ltd., some Japanese insurance groups, and reinsurers. Nevertheless, capital market and foreign exchange volatility will affect the region's insurance companies' investments.

S&P saw no immediate change in sovereign credit support for most Asia-Pacific countries in the immediate aftermath of the British poll results. Political and other uncertainties, however, have turned investors more risk-averse and this has affected trading conditions negatively in many markets. Should the impact of these uncertainties persist, borrowers that depend on external financing could see funding costs and availability deteriorate.

The rating agency also did not expect Brexit to affect the ratings on Asia-Pacific structured finance transactions. Unemployment is a key driver of loss in structured finance transactions and any direct impact of Brexit on employment conditions in Asia-Pacific economies is likely to be limited in the near term.

"Brexit's market impact is likely to be significant in the near term, particularly in terms of stock market and currency volatility," said Chan. 

"The medium-term impact on Asia-Pacific markets, however, is likely to be limited as investors make decisions based more on economic and financial fundamentals rather than just sentiment. If market volatility were to spike and prolong, we believe Asia-Pacific regulators are likely to take action, including extending short-term liquidity."

 

Thai shares, currency rebound 

The Stock Exchange of Thailand Index continued its gain on Tuesday, as investors are convinced of limited impact of Brexit to Thailand's economy, said Tisco Securities.

Proving this is the slight increase in SET Index today. The index ended the day at 1,437.42 points, gaining 13.11 points or 0.92 per cent. 

Meanwhile, the Thai baht also gained against US dollar. It strengthened to Bt35.28 per dollar at 6.45pm, against Bt35.32 on June 24.

 

Expected actions 

The Bank of England is expected to cut the official interest rate to 0 per cent from 0.5 per cent as early as the July meeting as a short-term measure to lift the UK economy from uncertainty created by the Brexit outcome, said a United Overseas Bank economist. 

In a research note, Lee Sue Ann said if it the central bank feels the need to do more, "we expect a reintroduction of QE (most likely at the August meeting alongside the inflation report and updated forecasts) rather than a move to lower the official rate into negative territory."

Short-term volatiity is huge. The 10-year UK bond yield fell to about 5 basis points below the 1 per cent mark on Monday. Meanwhile, the sterling is expected to experience substantial pressure as uncertainty lingers for the rest of the year. UOB lowered its forecasts for the sterling against US dollar, expecting the British currency to fall further to 1.28 per US dollar by the end of third quarter and then to 1.24 by the end of this year.

"We also think the euro will be negatively impacted. We have lowered our euro/dollar forecasts to 1.07 by the end of this year, from 1.13 previously. Our euro/pound sterling forecast is now 0.86 by the end of 2016," the economist said.