Does Trump, Brexit and Indyref2 mean Scottish businesses should be planning for political risk?
By Peter Flynn
Political risk analysis used to be focused mainly on developing economies. If a mining firm or an oil and gas company was thinking about opening up in a new country, that was when it was needed.
Financial services firms in the UK concentrated on business-as-usual functions and things like regulatory change, and there was relatively little interest in carrying out detailed political monitoring of European, US, and UK political developments. Sovereign and country risk research was useful in emerging market investment strategies, but politics at home was broadly stable and dependable. Surprises were rare.
Following the election of President Trump in the United States and the Brexit vote in 2016, the Grexit crisis in 2015, and the Scottish independence referendum in 2014, however, the stable old certainties of Western politics have been shaken up.
The financial sector has been particularly exposed, arguably reacting to (rather than being fully prepared for) the new US administration’s calls for Wall Street deregulation, or the potential loss of EU passporting rights for UK-based finance firms after Brexit, for example. In Scotland, there have been reports of firms exploring the possibility of establishing subsidiaries in cities such as Dublin in order to maintain EU trading access. How did we arrive at this point, and how might organisations navigate the new normal of political uncertainty in developed economies?
The Scottish referendum in 2014 was arguably an early example of how the politics of established Western democracies was becoming much more interesting to the financial sector. When the Edinburgh Agreement was signed in October 2012, the ‘No’ (to independence) side enjoyed a fairly comfortable lead in the polls (8% in a Panelbase poll carried out between October 9th to 19th, and 26% in a 22-26 October YouGov poll).
Some firms carried out scenario planning, and had contingencies in place, but these exercises arguably lacked the tangibility factor until the 2-5 September YouGov poll which put the ‘Yes’ side ahead. The fact, rather than the possibility, of a ‘Yes’ polling lead unleashed a flurry of political activity, as well as increased attention from the markets around the possibility of a schism within the world’s fifth-largest economy and the prospect of what we would now probably call a ‘Scoxit’.
Then there was Grexit. Greece, a Eurozone economy, looked potentially primed to leave, bringing about big and unpredictable changes to the European Union and global markets in the process. A (relatively) stable market infrastructure began to appear weaker, casting a lingering shadow over such totems as currency and political union, and raising questions about the future of another Union.
After the prospect of Grexit seemed to recede, Brexit appeared. The seminal political event of 2016 (until November), Brexit released a whole new level of uncertainty on markets. The old Indyref questions (what are the strategic, regulatory, tax, and operational implications?) were back for firms, on a larger scale. Far more thorough scrutiny of Westminster, Brussels and Holyrood has subsequently been required, to try to glean details of what kind of Brexit the UK government is aiming for, what the EU’s negotiating stance will be, what the implications are on regulatory change, what the implications might be on passporting, and whether the EU itself might even require a more serious watching brief.
‘Brexit plus plus plus’, as Donald Trump described his November victory, was the next disruptor. The result raised many questions. Would Dodd Frank be scrapped? Would the campaign’s anti- Wall Street rhetoric have specific policy implications? What of the ‘Trump Stimulus’, protectionism, trade wars, NAFTA, or TTIP? The element of surprise (for those who had forecast and planned for a Democratic victory) and the unpredictable nature of the early days of the presidency have required a similarly close level of attention as firms try to navigate uncertainty and plan ahead.
2017 has so far been another big year for political commotion: Article 50, the debate around Indyref 2, the unexpected UK General Election, and the Dutch and French elections, have each contributed to firms’ potential political risk exposure. The constitutional, legal, political and macroeconomic foundations upon which financial services firms are built have always been fluid, and democracies are always bubbling with opinion, disruption, and change; for now, however, things seem especially uncertain. It pays to monitor, plan for, and report on a range of possible political scenarios, in a way that wasn’t previously thought worth the effort. To paraphrase Milton Friedman, we’re all political risk analysts now. Or, at least, we ought to be.