Recently, British citizens voted to leave the European Union in a process dabbed Brexit that would undoubtedly have significant political, social, and economic ramifications in the short and long term. Notably, the financial realm will be the most affected due to the integrated nature of the European financial architecture. Expectedly, the currency market has already been subjected to shocks due to the volatile nature of the sector, especially from the political uncertainty witnessed. The Sterling Pound has been on a consistent decline since the results of the vote were released with many investors being wary of the British market. Broadly, the results from the referendum will negatively affect the British economy both short term and long-term.
To understand the dynamics involved, several concepts must be evaluated against a foreign exchange background to grasp the impact of the exit. To begin with, the international financial framework is defined by specific variables that include foreign exchange, which can be described as exchange of one currency with another to facilitate international trade. The British foreign exchange market has been majorly affected by Brexit; the Pound has lost value since the results of the vote were announced. In other words, individuals and institutions desiring to sell pounds for different currencies are receiving more in exchange while those acquiring the British money are spending less. A significant consequence of the above scenario is the erosion of foreign reserves since the government has to plug the deficit meaning imports into the country are quite expensive.
Import is a significant component of international trade since no country is self-sufficient and must rely on products from overseas to mitigate local shortfalls. Financially, a nation must pay for imports through its foreign exchange reserves, which adopt a negative curve if its local currency is weak in comparison to major tenders in the global market. The net effect is increased foreign exchange reserves that result in increased inflation, low value for the local currency, and a rise in interest rates similar to the case in Britain.
On the other hand, exports include goods and services developed locally and sold to other nations, which is a positive outcome since the balance of trade is usually in favor of the producing nation. Increase in exports is favorable to a state due to rise in foreign reserves, but the rate of exports in Britain is not on an upward trend, which means that foreign exchange has stagnated leading to a negative market environment. The outlook for Britain is bleak, not unless the government institutes reforms to make the country competitive in the international market. Most importantly, the authorities should engage in measures that will stabilize the British Pound.
A common denominator between imports and exports is foreign exchange as mentioned above, which guides the sale and buying of products in the international market architecture. As indicated, a devalued currency results in low buying power that instigates erosion of foreign reserves. Currently, the British foreign exchange reserve is under pressure due to the high cost of imports that can be directly linked to Brexit. Financially, the higher the value of currency results in an increase in its value in the international market, which enables a country’s economy to be either competitive in the global market or otherwise. Conversely, a low-value currency leads to a non-competitive economy on the world stage.
Investments usually assume a two-pronged approach that is either domestic or foreign. Domestic investment by a foreigner is mainly affected by foreign exchange since it determines the value of capital involved. Currently, a foreigner wishing to participate in the British economy will have an easy time since the value of the Sterling Pound is on a downtrend. The investors will receive more benefit for their foreign cash that can be used to facilitate their business, which reduces their operating costs significantly.
In contrast, a domestic agency desiring to venture into a foreign market will witness an escalation of costs in comparison to past years due to existing foreign exchange rates. The entity will be forced to use more money since converting British Pounds into other currencies will result in lower value for their capital, thus necessitating increased costs. Consequently, Brexit has produced an adverse effect on British investors since operating expenses are on the rise. The net result is that fewer businesspersons from England are willing to participate in overseas ventures due to cost implications.
The money market plays a vital role in any economy since it influences the financial sector fundamentally. However, the current environment in Britain is not conducive in light of a moribund economy that has affected traders negatively. Notably, most traders are holding short positions that can be attributed to the volatility of the British Pound, which illustrates the effect of the Brexit on the country. Secondary consequences include high-interest rates that affect economic growth since individuals or corporate organizations are unable to access credit facilities that are linked to Brexit. In other words, the cost of money in Britain is currently high, which affects circulation leading to a non-performing environment.
The recent vote by British citizens to detach the country from the European Union will have adverse effects on the financial and foreign exchange markets. The move will result in a low value for the Pound as already witnessed since the foreign exchange market is prone to shifts that can either be political or social. Further, the cost of investing for natives in the overseas market will be costly due to erosion in value of the Pound. In summation, the results of the referendum will primarily affect the British economy.