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There's still a risk of Asia contagion from Brexit

Lianna Brinded
Head of Yahoo Finance UK
A map illustrating China’s silk road economic belt and the 21st century maritime silk road, or the so-called “One Belt, One Road” megaproject, is displayed at the Asian Financial Forum in Hong Kong, China. Photo: Reuters/Bobby Yip

The UK parliament has voted down prime minister Theresa May’s Brexit deal twice and a third is apparently on the table. But while politicians also voted to reject Britain leaving the EU without an agreement, there is still a possibility that there could be a no-deal Brexit — also known as a hard Brexit.

This means there is still a risk to contagion spreading to other parts of the globe.

In a recent research note from Nomura, entitled What the Brexit saga means for Asia, authors Rob Subbaraman and Michael Loo said that Asia would only face “serious contagion” in the event of a hard Brexit.

The note was published just before the second parliamentary vote and the authors, like most analysts, pointed out that a hard Brexit was an “unlikely event.” However, even though members of parliament have voted to reject a no-deal Brexit when Britain is legally meant to leave the EU on 29 March, that vote is not legally binding and a hard Brexit could still be an outcome for the nation further down the line.

Nomura’s Subbaraman and Loo said that “the UK crashing out of the EU would likely drive the economy into recession and prompt a large depreciation of GBP. The [Bank of England] could be forced to raise rates, putting considerable strain on the UK financial sector.”

While the UK is not a major export market for Asia, it is Britain’s connections to the Asian financial sector that pose a great risk, according to the note.

“Reflecting the UK’s position as a global financial hub — UK financial sector assets account for over 8x its GDP — the financial channel is significant,” Subbaraman and Loo said.

“UK banks have relatively large claims on Asia, particularly in the two financial hubs, Hong Kong and Singapore, but also in Malaysia and Taiwan.

“A global asset market sell-off could add to this financial channel, through negative wealth, confidence, and liquidity effects. However, we believe only in the unlikely event of a hard Brexit would there be a high risk of UK banks retrenching from Asia and activating these financial channels.”