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Parliamentary Replies

Impact of Brexit on Singapore's Economy, Temasek Holdings and GIC

11 Jul 2016

Parliamentary Questions by Mr Patrick Tay Teck Guan and Mr Lim Biow Chuan:

To ask the Minister for Finance what is the short-term and medium-term impact of Brexit on (i) Singapore’s economy (ii) Temasek Holdings’ investments and (iii) Government Investment Corporation of Singapore’s investments.

To ask the Minister for Finance (a) what will be the impact of Brexit on the Singapore economy; and (b) whether the Government will take any action to mitigate any adverse effect on the stock market and the economy.

Reply by Deputy Prime Minister and Minister for Finance Tharman Shanmugaratnam:

Madam Speaker, as the topics are related, may I take questions 21 and 22 together please?

The short-term impact of Brexit is mainly on the financial markets, more than on economies. The immediate impact of Brexit on currencies and stock markets has also not been a major concern for us.

Following the Brexit vote, the British pound has declined sharply in value, and the US dollar and Yen have strengthened in global markets. Other Asian currencies including the Singapore dollar also weakened against the US dollar, as is typical when there is a sudden increase in risks in the markets. The resulting movement of the S$ on a trade-weighted basis has been orderly and contained. Stock markets also fell immediately after the Referendum, and have since recovered.

We can expect repeated bouts of volatility in financial markets as Brexit is debated and negotiated. But what is of greater concern are the economic and political uncertainties resulting from Brexit. These uncertainties will weigh on the UK, Europe and the global economy for at least a few years, and are likely to dampen growth.

The first uncertainty has to do with what Brexit actually means. There is no clarity within the UK, even among proponents of Brexit, on the nature of its future relationship with the EU. This state of affairs may persist for some time. It is also not clear when the UK will formally trigger Article 50 of the Lisbon Treaty, which serves formal notice to leave EU.

Second, even after formal notice is served, negotiations between the UK and EU are likely to be complex and prolonged. The basic conundrum is that the UK wants free access to the EU market but control over immigration from the EU, whereas the EU sees free access to its market and free movement of people as one package. Both UK and EU leaders will be mindful of their domestic political circumstances, and the EU will want to ensure that more member states are not encouraged to follow the UK.

In short, there is no precedent for Brexit, and no one can say how and when events will unfold. Until the future trade and investment relationships between the UK and EU are formally settled, the uncertainties will likely reduce investments and economic growth in the UK, and to some extent in Europe as well. They will present another headwind in a generally subdued global economic outlook for the next few years.

As of now, MTI does not expect these developments on their own to result in a significant reduction in growth in Singapore over the short term or the next few years. However, if a European slowdown coincides with other factors, such as a sharper than expected slowdown in China or the US, we will see a more major impact on our economy.

What happens over the longer term following Brexit is even less predictable, and a deeper concern. Analysts have begun to paint the possible scenarios. In the more optimistic scenarios, the UK and EU arrive at a new and mutually beneficial arrangement for trade, investment and immigration. If as a result the UK retains substantial access to the EU single market, we should not underestimate its ability to regain economic competitiveness and strength, and to remain a valuable economic partner for us in Singapore over the long term.

However, a more pessimistic state of affairs cannot be ruled out. The key unpredictability is in the political dynamics, both within the UK and in Europe. If the UK is unable to hold itself together as a union, or if nationalism gathers pace among the EU’s member countries, there will very likely be a permanent weakening of their economies. More divisive politics in the UK and EU will also weaken the resolve to undertake needed economic and financial reforms for the long term.

Last week, the World Bank[1] released a report stating that the Brexit Referendum outcome has marked a “historical shift in trade policy attitudes”, that could impair global economic growth. If we do indeed see a shift towards protectionist policies worldwide, it will have major implications for Singapore, which thrives on an open global trading system.

Madam Speaker, it is premature to say what the longer term impact of Brexit will be, positive or negative. We must watch the developments carefully, and be prepared to adjust our strategies so that we stay competitive as an economy and can retain good jobs in Singapore.

Let me turn now to Mr Patrick Tay’s question on the impact of Brexit on GIC and Temasek Holdings’ investments. GIC and Temasek, like other major global investors, can never be insulated from volatility in the financial markets. However, both GIC and Temasek make investment decisions for the long term, and look beyond the short-term market booms and busts. Their focus with regard to Brexit, for example, is to assess how it could fundamentally alter the long term prospects for the EU and the UK.

From time to time, GIC and Temasek will face market dislocations. They aim to weather the ups and downs of the markets, and adopt investment strategies that can deliver good long-term returns. The 2008 Global Financial Crisis (GFC) was a major case in point. Global capital markets saw much larger declines than what we saw recently with the Brexit vote. MSCI World (Equities) fell by more than 40% from its peak to the trough during the GFC. The value of GIC and Temasek’s investment portfolios declined significantly, together with the markets. But their portfolios recovered their value within one to two years, and have continued to grow since then.

Madam Speaker, the Brexit Referendum outcome is an important turning point for the UK and the EU. We must expect a period of economic uncertainty over the next few years at least. What is especially critical is how politics will unfold in the UK and Europe. It will have lasting economic repercussions, and extending beyond Europe. We will continue to watch these developments closely, be prepared for their impact on Singapore, and see what lessons might be useful for ourselves.