On 29 March 2017, Article 50 was triggered, beginning the UK’s two-year divorce proceedings from the EU. As countries hurtle towards to the official leave date, questions remain about how Brexit will impact the financial sector. Catherine Moroney, head of business banking at AIB, speaks to Briony Richter about how businesses across Ireland are reacting
Whether you are for it or against it, the uncertainty of Brexit is holding businesses hostage.
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No one knows what is yet to come, and businesses cannot tell how attractive the UK will be for trade – both domestically and internationally.
Potentially, changes to regulation and tariffs at European level will make it more difficult for businesses to operate unless they ensure they are prepared for all the possible outcomes. According to the latest AIB Brexit Sentiment Index for the fourth quarter of 2018, SMEs in both the Republic of Ireland (ROI) and Northern Ireland (NI) remain significantly cautious about the impact Brexit will have on their business.
Discussing the index and some of its highlights, Catherine Moroney, head of business banking at AIB, says: “At this stage we have been undertaking the index for six quarters. The trends have been very consistent, so there’s nothing that stands out as surprising. It’s actually the consistency that would probably surprise you.
“Let any me give you the two or three highlights: one of them that manifests itself into the economy is that 35% of SMEs in the Republic of Ireland and 40% in Northern Ireland who had plans to invest have actually cancelled or postponed their plans directly as a result of Brexit.”
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By GlobalDataMoroney adds: “It is a high percentage, and a further 13% have their plans under review. They don’t know yet if they are going to cancel them, so that means nearly half are cancelling or reviewing plans.”
Impact assessment
In a sense, this does reflect a high level of sensibility. Businesses, quite understandably, do not want to invest time and money towards an unknown situation that could potentially leave them worse off than before.
In addition to those businesses planning to halt investments, 52% of SMEs in ROI and 56% in NI have yet to begin Brexit planning. So, on the one hand, businesses are being careful with their investment and thinking about the impact of Brexit, which is sensible, but on the other hand, many have yet to start planning for it.
Many believe Brexit will be bad for business. In ROI, 68% of SMEs believe Brexit will have a negative impact on their business in the future, up from 63% in the third quarter of 2018. In comparison, 62% of SMEs in NI believe Brexit will have a negative impact on their business, unchanged from the third quarter.
These are worryingly high percentages, and they have already forced other companies across Europe to take protective measures. Fear of a no-deal Brexit has seen companies such as Airbus announce that it may consider moving its UK operations to the European mainland, putting thousands of jobs at risk in the process. In addition, Sony has announced the transfer of its European HQ to the Netherlands to avoid Brexit-related disruptions. With no solution yet agreed, businesses across Ireland have numerous concerns about the future.
“One of the key concerns is what level of customs and tariffs will apply,” Moroney notes. “So even if we leave out the matter of borders, if you look at the fact that the UK would be a third country from a European perspective, there is the real and present potential for tariffs to apply – and possibly at a world trade level.
“For example, that will have less of an impact on pharmaceuticals because they already have standards, but if you look at food, the customs duty that could be applicable there could range from 10% to 50% on certain raw food materials. That’s massive, and could have an immediate impact on a business’s cash flow.”
Outlining a further concern, Moroney adds: “The second one is the cost of the administration of all of those customs and tariffs, and of course the documentation needed. At the moment, businesses are used to being within a free trade area, and the UK is a very significant partner for Ireland.
“With the UK potentially being outside Europe, and also being a land bridge into Europe through the channel tunnel, those are all very high and practical concerns that businesses have.”
Current effects
Fears of the unknown continue to linger in the air; however, some sectors are already seeing a negative impact from Brexit.
Brexit continues to be a concern for the tourism sector in Ireland. The volatility of sterling is making holidays to Ireland more expensive for UK visitors, and the UK is a vital market for Irish tourism. The AIB Brexit Sentiment Index reports that 25% of tourism businesses in Ireland have reported lower sales, and 20% report higher costs of sales.
However, Moroney highlights that although Brexit has affected the sector, the industry is still growing. “Tourism as a sector is very buoyant and positive,” she notes. “However, tourism itself is concerned about the volatility of sterling impacting where they are seeing the business coming from. Sterling weakness is manifesting; there is a general feeling that UK tourists who would have come here for short day visits are sacrificing that because of the price increase.”
The current impact of Brexit depends primarily on the sector in question. “Tourism is already seeing an impact, whereas commercial real estate isn’t really at this time,” Moroney notes. “In between those sectors, it’s less about the impact so far and more about the lack of visibility of what the impact will be in the long run.”
While the tourism sector has concerns, the financial sector is actually seeing quite a benefit. Moroney explains that the Central Bank of Ireland has witnessed an increased number of applications for businesses across the country – some of which had previously been exclusively based in the UK.
“It is a sector that is seeing an advantage in Ireland,” she says. “That said, the challenges to food, drink and retail are significant. Even though it is absolutely the UK’s decision to leave, and we respect that, Ireland feels that Brexit overall is not a good thing from an economic perspective.”
Asked whether it came as a surprise that applications were increasing, Moroney notes: “As soon as the announcement came in 2016 that Britain would leave, it became obvious where the challenges would be. The bottom line is that Ireland has been preparing for this from the start. The capacity ability is being looked at by all players. Like anything, business is business and things will adjust.”
Brexit ready check
From the moment the Brexit announcement was made, AIB started to hold events all over Ireland. Alongside partners and stakeholders, AIB spoke to customers about the potential implications. It also trained Brexit advisors, distributed around the country, to be expert advisors to customers, backed by the website and telephone advice.
While speaking to customers, AIB created a series of questions to ask them in order to assess how ready they were for Brexit. The questions surrounded supply-chain and cash-flow health, among others. Moroney notes that customers also started to ask for copies of the questions.
“Due to customer interest, what we decided to do is create the AIB Brexit Ready Check, an app where, within five minutes, a customer can answer questions about their business and get back a dashboard with colours – green, amber, red – that prompts them toward areas that they may need to address.
“It’s really a private, online way to have that conversation. We don’t store that data; we only store how many people have used it, but we don’t know any of the answers given.
“What we are saying to all our customers is to make sure their cash flow doesn’t catch them out. If you think you are going to have an extended supply chain, that costs money. Basically, have the conversation early and be prepared.”
The uncertainty, however, is still looming, and preparation is essential. Moroney concludes: “I would say to all businesses now: plan for the worst. That’s not a forecast for what will happen, but our role is to support our customers.
“Our advice now is to assume there is going to be a hard Brexit. At this stage, anything a customer does is not a waste of time and money, even though we understand that they don’t want to invest towards a situation they don’t know.
“Our absolute strategy is to help our customers achieve their dreams and ambitions. We are open to partnerships and collaborative agreements that will help our customers.”
Currently, the EU covers 28 countries with 500 million potential customers. Not being part of the EU risks eliminating the benefits of free trade, as well as the free movement of goods, services and people.
It also potentially cuts off a massive market of both buyers and sellers, so it is imperative that businesses prepare for whatever outcome may occur.
