What the Brexit extension and UK snap election means for corporate treasurers

On October 28th, the President of the European Council Donald Tusk approved yet another Brexit extension, pushing the deadline for Britain’s exit from the EU back to January 31st. A day later, British lawmakers, in a bid to break their Brexit deadlock, called a general election to be held on December 12th, with Parliament set to dissolve on November 6th, giving political parties just five weeks to launch their respective campaigns. Most businesses based in the UK and Europe will welcome the EU’s latest extension because it ultimately avoids a no-deal Brexit. However, it also means that corporate treasurers are staring down the barrel of another three months left in limbo.

“We expect the extension to be a mixed bag for British businesses,” Research Editor at Hargreaves Lansdown Nadeem Umar said. ‘On one hand, they have more time to – as the government calls it – “get ready for Brexit”. On the other, it’s an extra period of uncertainty,”

“The Bank of England (BoE) recently talked about how uncertainty is bad for business. The economics behind it also says, in the context of Brexit, lots of shorter delays are worse for big investment decisions and might lead to poorer outcomes for businesses than a single, longer delay.”

Even the new Brexit deadline could pose a challenge to corporates simply due to it coinciding with many companies full-year results.

“A lot of larger corporates have a financial year end of 31 December so, coming on top of the additional business activity and liquidity management that treasurers typically see around that time, there is some concern that the complexity of preparing for Brexit by 31 January could be amplified, especially in the event of no deal”, said James Winterton, Associate Director, Policy & Technical, at the Association of Corporate Treasurers (ACT).

One thing that most corporate treasurers can take solace from, however, is that at least the level of uncertainty they face in the build up to the January 31 deadline is not fundamentally that different to where they were on March 29.

Differing perspectives for corporate treasurers

Despite treasurers sharing the same key functions and responsibilities, the impact of uncertainty posed by Brexit can differ somewhat depending the company’s size, underlying business activities, geography and the financial institutions it works with.

For example, a corporate treasurer working for an EU-based business that works with a UK-based bank to trade euro-denominated derivatives may require those contracts novated across to an EU 27 branch of that bank. Therefore, a further delay to the Brexit deadline could be viewed as a bonus for larger corporates that have more exposure to Brexit in this regard.

Equally, you could also have a situation whereby a corporate treasurer in the UK relies on services from an EU 27-based bank or asset manager and wishes to maintain that relationship. To do so, would require the financial institution in the EU to ensure that it had signed up to the UK Financial Conduct Authority’s temporary commissions regime which enables them to continue to service those contracts.

However, the most pressing issue for most treasurers with regards to the uncertainty generated by Brexit will revolve around their underlying business activities. Meaning that many remain concerned about what will happen in terms of the EU customs union and how Brexit will impact the movement of goods between EU member states and the UK.

Sterling and UK financial assets volatility likely to increase

Ultimately, the role of a corporate treasurer is to manage financial risks, including foreign exchange volatility, funding, and cash management. And while the prospect of a snap general election and a delay to Brexit increases the likelihood of the UK leaving the EU with a deal, most commentators expect the pound and UK financial assets to become increasingly volatile over the next three months, posing a significant challenge to treasurers operating across multiple jurisdictions.

“From a macro standpoint, a snap election means more time will pass before the UK can focus on economic matters and implement expansionary measures,” FX Sales Trader at Saxo Markets Olivier Konzeoue said. “Credit impulse would slow UK growth down through to the end of Q1 2020. No doubt this would weigh on GBP mid-term as would the risk implied by a general election.

“Cable is mildly higher as the general election was voted and the upside looks limited until the campaign really kicks in and all parties show their hand. Headline risk will be king and sterling is destined to trade sideways for the time being,” he added.

However, for some commentators, the factor that is likely to increase volatility of the pound, financial assets and the wider British economy is the prospect of another hung parliament or a victory for Jeremy Corbyn’s Labour party.

“Should [Corbyn] win this election, his anti-free market policies – such as the re-nationalisation of industries from utilities to railways to postal services, and the forcing of companies to give 10% of their shares to staff – plus his high-tax policies, including a possible wealth tax, will spook the financial markets, hit long-term sustainable growth of the British economy, put more pressure on UK financial assets, and lead to a significant sell-off of the pound,” CEO and founder of deVere Group Nigel Green said earlier this week.

It is worth noting, however, that when it comes to the general election, the result changes little about the potential Brexit outcomes, with MPs still left with the choice of leaving with, or without a deal, or in the extreme ditching Brexit altogether. Therefore, corporate treasurers concern about the election will focus more on the composition of each party’s manifesto and how their policy proposals may impact their ability to fund corporate strategic initiatives and find liquidity during a period of heightened uncertainty and change.