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The Effects of Brexit on Global and Vietnamese Financial Markets

Group Assignment Cover Sheet


Subject Name

Financial Risk Management

Lecturers Name

Dr. Nguyen Thi Thuy Linh

Title of Assignment

The Effects of Brexit on Global and Vietnamese Financial Markets

Class

BBUS4.1

Group Number

Student Number and Name

1. Nguyen Hoang Anh - 31131023086


2. Nguyen Hua Thanh Le - 31131021192
3. Doan Thanh Long - 31131022563
4. Nguyen Ngoc Linh Dan - 31131022236
5. Phan Van Tien Huu - 31131021623

Contact Number or Email

Victor.engtalk@gmail.com 0121 288 3731

Length

1755 words

Due Date

August 27th, 2016

Date Submitted

August 27th, 2016

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The Effects of Brexit on Global and Vietnamese Financial Markets

The Effects of Brexit on Global and Vietnamese Financial Markets


Group A
Nguyen Hoang Anh
Nguyen Hua Thanh Le
Nguyen Ngoc Linh Dan
Doan Thanh Long
Phan Van Tien Huu
Financial Risk Management
25 August 2016
Dr. Nguyen Thi Thuy Linh

The Effects of Brexit on Global and Vietnamese Financial Markets


Executive Summary
The proposed referendum of the UK on whether England should leave European
Union has been attracting attention of the global community as this event may have
considerable impacts on the worlds economy as a whole and the financial markets in
particular. For the purposes of this report, the effects of Brexit on the international and
Vietnamese financial markets will be closely examined.

The Effects of Brexit on Global and Vietnamese Financial Markets


Introduction
England chose to leave the EU with the vote results were 52% of agree compared to
48% of not agree, after a referendum on Thursday 23th June in 2016. This occurrence results
in massive concerns of not only British citizens but also people from all over the world about
a unpredictable scenario of the global economy and especially the effects on the financial
markets. Vietnam has long been a strategic economic partner of the UK, therefore this event
has also significant influence on Vietnamese economy and financial markets as well. This
report will shed light on how Brexit affect the international and Vietnamese financial
markets.
The effects on global financial markets
The immediate risks
The result of the referendum brings about immediate consequences. The value of the
British Pound is currently plummeting, stock markets are in freefall and no doubt a sizeable
outflow of capital is underway Invalid source specified..

According to
Value
Figure 1: Value of sterling against US dollar since 1971

of sterling

The Effects of Brexit on Global and Vietnamese Financial Markets


against US dollar since, the pound has collapsed to its lowest level in over 30 years, suffering
its biggest one-day fall in living memoryInvalid source specified..In addition, experts
forecast the pound also fell 14-15% within a yearInvalid source specified., pushing the UK
to stand at risk of losing position the center of global finance and Dennis de Jong - managing
director of UFX.com said that "This is simply unprecedented, the pound has fallen off a cliff
and the FTSE is now following suit." At the end of 24th June 2016, The FTSE 100's initial
slump was its biggest one-day fall since the collapse of Lehman Brothers in October 2008.

Figure 2: FTSE 100 fall as trading opens after Leave vote.


Proposed referendum on United Kingdom membership of the European Union will
make the UK lose a stable market of 500 million people in the EU, leading to a loss of 6%
General Domestic Product (GDP) in 2020, by more than half of UK exports is destinations
are the EU countries, contributions from 4% to 5% of GDP Invalid source specified..
Investors are no longer interested in the UK market because of this country no longer enjoy
the benefits of the EU. Meanwhile, the UK need large amounts of foreign currency to pay for

The Effects of Brexit on Global and Vietnamese Financial Markets


import operations. This will be one of many reasons to push the British economy into
recession in the long term, according to the forecasts of many experts.
The impact of Brexit on UEs market and others (such as China, US, Japan, etc.)
Before the occurrence of Brexit event, many economists forecasted there would be
huge economic effects on the world financial market, especially the EU. According to Phil
Noble (2016) there are four main financial risks that EU has to face with when UK leaves:
budget, investment, trade and currency. The first significant loss of EU is the annual net
contribution of UK, which is accounted for 8.5 billion to 9.5 billion, approximately 5.8%
EU expenditure Invalid source specified.. The consequence of this is the other members of
EU, such as Germany- the largest member, will be required to fulfil the vacancy by
contributing additional amount unless there is a cut down on EU expenditure.

The second

impact of Brexit on the European Union market is investment. The United Kingdom annually
receives the largest amount of EUs foreign direct investment accounting for 21% in the
2000-2014 periods. If UK loses the potential of being the gateway to access EU, the
investment obviously would pour in other EU members.

The Effects of Brexit on Global and Vietnamese Financial Markets

Share in EU inward FDI (%), 2000-2014


Remaining EU-28; 15%
Luxembourg; 3%
UK; 22%
Sweden; 4%
Poland; 4%
Germany; 12%
Italy; 5%
France; 7% Belgium; 10%
Netherlands; 9%
Spain; 9%

Sources: UNCTAD and Citi Research

Next, based on data from ONS, The Pink Book, 2014, imports from countries within
the EU is 221.4 billion, over half of the UKs imports. Therefore when leaving EU, import
tariff will be applied, accordance with World Trade Organization rules, even the changes will
be small but it somehow affects trading relationship between EU and UK.
And finally, Noble forecasted the whenever Brexit occurs, the British pound would become
weaker than others currency, especially US dollars. Only a few hours after UK voted to leave
EU, the exchange rate USD/GBP raised 0.6685 to over 0.7225 (Lawrence, 2016). As a result,
Brexit also lead to the reduction of euro-based earning of European companies in UK.

Figure 3: Share in EU inward FDI (%), 2000-2014

The Effects of Brexit on Global and Vietnamese Financial Markets

Figure 4: USD/GBP exchange rate variation over 90 days


In terms of other markets, we are considering the two largest ones US and China. For US,
according to Tim Smith (2016), since the British pounds weakness would affect the Euro, the
American companies and investors who invest money in UK and EU will likely to suffer
from credit risks. Moreover, the consequences of Brexit somehow had impact on the citizen
of United Kingdom and Europe; people might feel uncertain about the economy so they
reconsider their spending. If the customers continue to cut down their spending, there will be
a significant loss for US market. Considering the China market, Brexit seems to have slightly
effects on China GDP. According to Forbes, the decrease of demand in EU leads to the
decrease of GDP in China from 6.2% to 6% (2016).

The effects on Vietnamese financial markets


Direct impacts of Brexit on Vietnam
When UK leave the EU will have negative impacts on Vietnam's economy through
trade and investment channels.
Up to 2015, in terms of investment, the UK had 222 valid projects with a total

registered investment 4.437 billion and is ranked 15th among 105 countries and territories
investing in Vietnam. Capital of British foreign investment focused primarily real estate

The Effects of Brexit on Global and Vietnamese Financial Markets


sector and processing technology. If Britain left the EU, economic growth in Britain fell,
accompanied by reduced savings and investments, more or less will affect the flow of capital
from Britain in Vietnam.
According to Dr. Luong Van Khoi, vice president of National Center for Socio Economic Information and Forecast, Vietnam has maintained a trade surplus in the UK. The
export turnover of Vietnam to the UK achieving compound growth (CAGR) of nearly 17%
over the period 2008-15, reaching a record US $ 4.65 billion in 2015, equivalent to 15% of
the export value of Vietnam in the EU area. Separately first 5 months of 2016, Vietnam
exported to the UK's super $ 1.7 billion and $ 3.9 billion in 2015. Britain's economic
downturn will lead to a reduction in demand for commodities from Vietnam, reduce exports
and trade surplus.
Although Vietnam's exports to the UK accounted for only 3% of the total value of
exports, Vietnam always has trade surplus to this market. If the UK economy downturn, the
British pound depreciated even if our exports to Britain, the volume does not change when a
large sterling devaluation will affect the value of our exports to the UK, do reduce the value
of our trade surplus with the United Kingdom, will make Vietnam's trade deficit to rise.

The Effects of Brexit on Global and Vietnamese Financial Markets

In the long run, the British pound decreased in value after this country voted to leave
the European Union (EU). Its consequences will lead the Yen increased in value, and Euro
diminished in the value. Furthermore, the structure of public debt in Vietnam includes 55
percent from Vietnam Dong, 16 percent from USD, 13 percent for Yen, 7 percent for Euro
and 9 percent for other currencies. Yen increased in value will make high public debt; this is a
long-term risk for Vietnam. This risk could increase because of the appreciation of the Yen.
The high government debt will make slow economic grow and create the burden on the
states budget.
Indirect impacts of Brexit on Vietnam
Brexit would have a significant indirect impact to Vietnam's economy through trade,
investment and world commodity prices. (Mai, 2016)
First of all, it would quickly affect domestic general price and domestic gold price.
The increase in World gold price would result in the immediate increase in domestic gold
price. In June 6th, domestic gold price increased surprisingly and reached the price of 35.5 to

The Effects of Brexit on Global and Vietnamese Financial Markets


35.9 million VND per ounce, which is 1.9 million VND higher than the initial price before
Brexits final result. This price is also the highest price recorded since August 2015.

Global economic outlook will be bleaker after the results of the referendum in the
UK. With global growth prospects reduced, growth in emerging economies in Asia, including
Vietnam will probably go lower in the coming months.
However, despite the immediate, direct impact of proposed referendum on United
Kingdom membership of the European Union to Vietnam is not considerable, but the indirect
impact is significant, in the context of Vietnam's economy increasingly deeper integration
with the world economy.
In the case the UK withdrew from the European Union (EU), known as Brexit, the
Vietnam market will encounter with many disadvantages. In particular, the stock market is
the place where unexpected results are not favored by investors, will have some fluctuations.
The stock market in Vietnam decreased 11.5 points about 1.85 percent to 620.77 after Brexit
vote. However, many experts believe that VN-Index is mainly affected indirectly by the
volatility of the global stock market, which will create the investors panic rather than the

The Effects of Brexit on Global and Vietnamese Financial Markets


negative influence of Brexit on Vietnam. Besides, the shift of indirect capital flows is one of
the reasons that impact Vietnamese stock market. When the global market is stable, the
foreign capital flows will limit investment on the potential risks market like Vietnam and the
foreign investors including EU, UK will move their money from Vietnamese market to
traditional market to avoid the risks. In addition, Brexit may also have indirect impact on the
enterprises, having commercial relations with European Union (EU) such as footwear,
coffee.
Conclusion
To sum up, Brexit has shown several unexpected effects on the worlds economy and
the global financial markets such as the immediate depreciation of GBP or decrease of
investments. In Vietnam, Brexit has bot direct and indirect impacts on the economy and
financial markets shown through the decline in points or the unexpected fluctuation of stock
market, which might fear many investors. The Vietnamese government should have
appropriate plan to improve the economy and make the market more stable. Vietnam will
prevent these impacts and become the attracting destination for capital inflows.

The Effects of Brexit on Global and Vietnamese Financial Markets


Reference
Mai, N. (2016). Brexit s tc ng th no ti kinh t Vit Nam.
Bnews.vn. (2016, June 24). Nhng h qu trc mt ca vic Anh ri EU. Retrieved from
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Business. (2016, June 24). Pound plunges after Leave vote. Retrieved from BBC:
http://www.bbc.com/news/business-36611512
VARDAKOULIAS, O. (2016, June 24). Brexit: the immediate risks. Retrieved from The
NEF: http://www.neweconomics.org/blog/entry/brexit-the-immediate-risks
Buiter, W., Rahbari, E., & Schulz, C. (2016). The implications of Brexit for the rest of the
EU. VOX, CEPR's Policy Portal.
Irwin, G. (2015). BREXIT: the impact on the UK and the EU. Global Counsel.
Noble, P. (2016). From budget to banks: How Brexit could impact the EU economy. Reuters.
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http://baodautu.vn/brexit-se-tac-dong-the-nao-toi-kinh-te-viet-nam-d47443.html
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