Malta among ‘most exposed countries’ if UK were to exit the EU

If the United Kingdom were to exit the European Union, Malta would be amongst the most exposed countries to feel the economic impact, according to credit rating agency Fitch.

The impact is based on the fact that Malta’s exports of goods and services to the UK are at least 8% of the country’s GDP whilst Malta also holds large stock of foreign direct investment and financial assets in the UK.

In its risk analysis of an eventual Brexit, Fitch argued that the extent of the economic impact on EU exports to the UK would depend on the nature of any UK-EU trade deal and the degree and duration of sterling depreciation.

“The economic impact of Brexit would be lower for the EU than for the UK, but would still be palpable. It would reduce EU exports to the UK, although the extent would depend on the nature of any UK-EU trade deal and the degree and duration of sterling depreciation,” Fitch said.

“The most exposed countries would be Ireland, Malta, Belgium, the Netherlands, Cyprus and Luxembourg, all of whose exports of goods and services to the UK are at least 8% of GDP.”

Brexit, Fitch Ratings said, would weigh on the economies of other EU countries and increase political risks in Europe, Fitch Ratings says.

“We would not expect to take any immediate negative rating actions on other EU sovereigns if the UK left. But negative actions would become more likely in the medium term if the economic impact were severe or significant political risks materialised.”

Fitch would then review the UK sovereign rating in the event of a 'leave' vote in the 23 June referendum.

EU countries could gain from the shift of some FDI from the UK to the EU. “However, countries such as Luxembourg, Malta, Belgium and Germany, with a large stock of FDI and financial assets in the UK, would suffer losses in the euro value of those assets if there were a permanent depreciation of sterling. The banking sectors of Ireland, Malta, Luxembourg, Spain, France and Germany have sizeable links to that of the UK.”

Brexit would reduce the UK's contribution to the EU budget – a net €7.1bn in 2014 after rebates – potentially to zero. This would imply that other net contributors would have to increase payments, or net recipients accept lower EU expenditure.

“Brexit would create a precedent for countries leaving the EU. It could boost anti-EU or other populist political parties, and make EU leaders more reluctant to implement unpopular policies with long-term economic benefits. Negotiating the terms of the UK's exit could exhaust the EU's time and energy and open up new fronts of disagreement,” Fitch said.

“Brexit could shift the centre of gravity of the EU, making it more dominated by the eurozone core, poorer, more protectionist and less economically liberal. If the UK were to thrive outside of the EU, it might encourage other countries to follow suit.”

The agency said that a Brexit could precipitate Scotland leaving the UK, which might intensify secessionist pressures in other parts of the EU, such as Catalonia in Spain.

Fears of other countries leaving could widen bond spreads for "peripheral" countries, potentially increasing the average cost of debt and making it more challenging to reduce government debt/GDP ratios.

In its analysis, Fitch said it was not recommending any particular position, vote or outcome regarding the referendum vote on 23 June 2016.

The research, it added, was to simply provide the financial marketplace with increased transparency as to the possible impact on our ratings of various hypothetical outcomes from the referendum.

The report is available on www.fitchratings.com.