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What Impact Will The EU Referendum Have On Foreign Investments?

Fight or flight?

28May

The UK’s excellent record in attracting Foreign Direct Investment (FDI) continued last year, with the number of FDI projects going up 11% to 887 compared with 2013, according to EY’s 2015 UK attractiveness survey. The UK was also ranked fourth globally - behind the US, China and India - when investors were asked to name their first-choice investment destination. There was particularly good news in the manufacturing sector, with the nation’s 164 projects comfortably ahead of Germany’s 131.

The good news was, however, tainted by the survey’s findings that 31% of investors will either freeze or cut investment until after the outcome of a referendum on the EU, expected to take place in 2017.

The news is understandable, given the reasons most investors cite for choosing to put money into the UK. The political stability and predictability consistently rank towards the top of reasons given by investors, while access to the European market was cited as important for 72% of those surveyed. The concerns echo those already expressed by a number of business leaders, with HSBC, for one, recently announcing that they were evaluating the merits of moving their headquarters abroad, naming a Brexit among their considerations.

The ramifications of a slow down in FDI could be severe. With the UK’s current account deficit already the widest of the G7 nations at 5%, it is likely to hit the sterling badly, while the recovery is still fragile and unbalanced.

Just last year we saw the impact on investment an independence referendum can have. In the month before Scotland decided to remain part of the UK, investors withdrew $27bn from British financial assets - the biggest capital outflow since the crash in 2008. The effects on FDI do not seem to have been too severe though. Foreign investment in Scotland only fell by 2 projects last year, down from 82 to 80.

There are many notable differences between the situation with Scotland. One of the main problems Scotland had was the confusion around what currency they planned to take, and the likely absence of a lender of last resort, a problem that the UK does not have should it leave the EU.

Fears around a referendum appear to negated, at least partially, by some degree of positive sentiment, particularly from the US. More than a third of all investment projects into the UK in 2013 came from US investors, with 21% of those surveyed by EY saying they would keep FDI on hold, 10% say would invest less, and 15% saying they would actually increase the levels.

The outcome of the EU referendum appears secure, with support for staying in the EU running 10 points ahead of those who want to withdraw, although the narrowing opinion polls in the run up to the Scottish referendum are fresh in the memory for those hoping for a smooth ride. To counter any instability, the referendum must take place as early as possible, rather than letting panic set in.

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