The UK’s sudden decision to leave the EU came as a shock to many. The world is concerned about the possible shock waves that may stem from the exit, some of which we have already begun to see, including:
- US$2 Trillion in value lost across the world global markets
· The Pound falling to a 31 year low against the US$
· Indications of job losses in the UK
· Possible breakup of the UK, as Scotland and Northen Ireland have indicated they will remain in the EU, and Scotland has also stated its intent to again vote to be independent of the UK.
As a result of the linkages of banks across the world, it is expected that this will cause some instability in the market, and there is a heightened fear that this could push Britain into a recession. Last week Friday (June 24), the British pound lost about 9 percent of its value following the June 23 vote, and although it is too soon to call, it is expected that Britain will experience more severe consequences.
The area of most concern is trade and trade policies. The EU is UK’s biggest trade partner, however, with their decision to leave, it is expected that new policies will be drafted. Caribbean nations, such as Jamaica, are eagerly watching the international scene to see any further impact that Brexit will have as a nation and on us as a region.
Jamaica currently has two agreements relating to the EU. These are the ACP/EU Cotonou Partnership Agreement (CPA) and the CARIFORUM/EU Economic Partnership Agreement (EPA). The ACP/EU Partnership Agreement was signed on June 23, 2000, and covered a 20-year period from 2000 to 2020. The fundamental principles of the Cotonou Agreement include equality of partners, global participation, dialogue and regionalisation. Brexit is not expected to affect this current agreement, since it is expected to end around the same time Britain will finalize their termination with the EU.
CARIFORUM on the other hand, is made up of several Caribbean countries. The EPA allows Jamaica to enter the UK market duty-free and quota-free.
It is expected that Jamaica’s trade ties with the UK will be impacted, although the EU has promised that Brexit will not affect their relationship with others. The implications for Jamaica is that we will have to consider new trade agreements with the UK. The link between Jamaica and the EU will strengthen or weaken depending on their relations after Brexit. The relationship between Jamaica and the UK will depend on the UK’s overall economy. If Britain experiences growth, then Jamaica will have expected to benefit from better trade agreements, however, the reverse is also true.
Remittance inflow is expected to be affected. Data from the bank of Jamaica showed that net remittances for the 2015 calendar year totalled US$1481.8 million and total remittance inflows in 2015 amounted to US$2226.0 million. Remittance as a percentage of GDP was 16.1%. Of the total remittance inflow, US$331.4 million or 14.86% were from the UK. This the second highest following the United States. The impact on inflow will depend on the state of the UK’s economy after Brexit.
Assuming that Brexit causes instability in the international economy, then domestic interest rates will be expected to fall to counteract any possible effects. The effect that this will have on the economy will depend on the severity in international markets. If the international market is mildly affected, then it is expected that investors may use the opportunity to invest, however, if adversely affected this may result in a reduction in international investments.
Another speculation is that international oil demand may decrease due to uncertainty in the market, which will cause a decrease in prices. Data from the Bank of Jamaica reflected that for last year Jamaica’s goods & services balance improved. This was as a result of a fall in imports, associated with significant declines in the prices of international commodities especially crude oil. If oil prices decrease once again, then this may result in another improvement.
There is much uncertainty surrounding Brexit. However, a few negative, as well as positive effects, can be identified based on assumptions.
In summary therefore, as it relates to Jamaica, we will need to speedily move to protect our trade agreements, and especially with the UK, which is Jamaica’s main trading partner in the EU. The PSOJ will continue to communicate with the Ministry of Foreign Affairs to keep abreast of any developments so that we can continue to update our members. We will also monitor what happens in the UK economy, so that we can project any effect on trade demand and remittance flows into Jamaica.
PSOJ RESEARCH DIVISION
JULY 1, 2016