In the Asia macro strategy weekly released on July 4, ANZ said financial markets look to have digested the Brexit shock in an orderly manner, no doubt with some assistance from central banks providing calming words and ensuring adequate global liquidity.

Asia’s direct trade exposure to the UK is small, at only 2.1% of its total exports. The actual exposure of Asia’s gross domestic product (GDP) to exports to the UK is even smaller, ranging from less than 2% in Vietnam to less than 0.2% in the Philippines and Indonesia.

However, Asia has a much larger exposure to the rest of the EU, and it is the indirect impact of Brexit on the rest of EU growth that is more significant. Although the share of Asia’s exports to the rest of the EU has declined over the last decade (except for Vietnam), the uncertainty of the EU-UK relationship could put a dampener on external demand from that region, ANZ said.

According to the report, Vietnam is likely to suffer less from Brexit than other Asian markets because structural changes to its export product mix to the EU mean that Vietnam will continue to register positive growth, albeit at a lower rate.

Meanwhile, export-reliant economies face the most downside risks. These include Singapore, South Korea and Taiwan. Policymakers have already responded in South Korea and Taiwan, and there is a chance of the same from Singapore later in the year.

The EU is Vietnam’s second largest export market reaching 19.2% in 2015. It is the number one destination for several of Vietnam’s key exports.

Of the US$162-billion total export turnover last year, around 2.9% was shipped to the UK. Among the countries in emerging Asia, only Vietnam reported an increase in the share of its export exposure to the EU over the last decade as the products of the EU and Vietnam are strongly complimentary.

As a foreign direct investment (FDI) magnet, Vietnam rapidly changed its export product mix. However, the cumulative FDI from the EU is only 5.3% of registered FDI in Vietnam.

Companies from some 25 EU member states have set up shop in Vietnam, with the Netherlands taking the lead. Trade relations with the EU are expected to strengthen further after the negotiations for the EU-Vietnam free trade agreement (FTA) were completed in December last year.

The trade pact is expected to be ratified by the remaining members of the EU by early 2018. EU market access will greatly benefit the apparel and footwear industries, as well as agricultural products like rice and fish.

On the other hand, almost all EU exports of machinery and appliances will be fully liberalized once the FTA comes into force. Car parts from the EU will face no duties after seven years of FTA enforcement.

The ambitious EU-Vietnam FTA took 44 months of negotiations before the text of the FTA was published. The UK will likely need to face a similar timeline to sell its capital goods duty-free to the country.

Source: The SaiGonTimes