Madrid, Mar. 28 2019 — In S&P Global Ratings' second edition of "Brexit Sensitivity Index 2019: Who Has The Most To Lose?," it lists the 21 countries most exposed to Brexit. This year, Ireland, Luxembourg, and the Netherlands feature as the economies most susceptible to any trade and migratory aftershocks of a potential Brexit.
Our Brexit Sensitivity Index (BSI) measures goods and services exports to the U.K., bidirectional migrant flows, financial sector claims on U.K. counterparties on an ultimate risk basis, and foreign direct investment (FDI) in the U.K. (excluding FDI claims attributed to special purpose entities, see Appendix).
We first published our BSI on June 9, 2016, two weeks before the U.K. national referendum on whether the country should leave the EU. Since then, we have modified our methodology for calculating two of the four BSI factors, so that the data more accurately reflect financial linkages between European economies and the U.K. The BSI is the sum of these four data points all normalized and converted into a scale from 0 to 1. The higher the sum, the greater the exposure.
Nine of the 10 countries with the greatest exposure to Brexit in 2016 are still in that group today, although there has been a reshuffling in the rankings. Perhaps the most notable change is that the Netherlands has moved up four places to become the third most vulnerable economy. Between year-end 2015 and year-end 2018, Dutch exports to the U.K. increased by nearly 0.6% of GDP, and Dutch banks still carry high exposures to U.K. counterparties.
For the 2019 BSI, we have included Portugal for the first time. Its ranking of 16 indicates relatively low exposure, stemming from low FDI and financial sector claims on the U.K., despite significant export and migratory exposures.
The other key difference we've observed is the contrasting approaches larger European banking franchises are taking toward their U.K. exposures. Compared with end-June 2016, the banking systems of Belgium, Germany, Ireland, and Switzerland have cut their exposures to U.K. counterparties--a trend in place long before Brexit was contemplated. In contrast, since the U.K. referendum, banking systems in the Netherlands, France, and Spain have increased their U.K. business, when measured on an ultimate risk basis.
At the same time, the financing of the U.K.'s large external deficits has shifted away from FDI toward portfolio equity and debt [See the U.K. Office of National Statistics (ONS) third-quarter 2018 Balance of Payments report]. This indicates to us that, during 2018, concerns about the consequences of Brexit for the U.K. have already led to a weaker global and European appetite to make long-term investments in the British economy. This is something to watch, in light of the U.K.'s current account deficit of 5% of GDP, the second highest in the world in absolute terms.