U.S., Europe largest contributors to FDI, report shows
ReutersBank of England Governor Mark Carney speaking to members of Britain's parliament on Tuesday
Britons should expect a drop in foreign direct investment into their country if the U.K. decides to cut membership ties with the European Union, the head of the Bank of England said Tuesday.
Financial markets have been confronting the issue of whether U.K. voters will support the country leaving the European Union, a risk known as “Brexit”. A referendum on the issue will be held on June 23.
“All things being equal, one would expect that on the margin there would be a reduction in foreign direct investment given that level of uncertainty,” said Bank of England Governor Mark Carney, in testimony before the Treasury Select Committee.
The U.K. logged net FDI inflows of £44 billion ($62 billion) in 2014, according to a U.K. Trade & Investment department report published in June 2015. FDI is investments from overseas entities in a variety of assets, such as property, equipment and stock purchases.
“Uncertainty…including about future trading arrangements could cause institutions, firms to delay investment,” Carney told lawmakers, adding that he couldn’t specify the potential amount of FDI that could be lost.
The U.S. and Europe are the largest investors in the U.K., according to the UKTI. U.S. investors held the largest share of FDI stock at 27%, followed by the Netherlands and France, at 15% and 8%, respectively. FDI stock is an often-used indicator of a foreign investors’s long-term commitment to another country, the report said.
Read: Why U.S. investors should fear a ‘Brexit’
Investment houses have been warning about the potential hit on the U.K. economy and its currency if the country breaks away from the EU. Such scenarios include an abrupt drop in capital inflow. A decline in such inflow could make it harder for the U.K. to fund its current-account deficit as it would need to borrow more money from abroad.
Bank of England says economic factors in play on 'Brexit'Bank of England Governor Mark Carney said the central bank won't be making any recommendation on whether the U.K. should stay in the European Union.
The country has a “still-significant current-account deficit of just over 4% of GDP,” said J.P. Morgan Asset Management in a note this week.
In relation to the financing of current accounts, Carney said the issue is more centered around the net flow of new investments and “not really a question of people selling assets here; they could.”
“But it’s about their incentive to add more or to come to this economy and make large investments at a time of uncertainty,” he added.
Mitigating factor?: But a potential decline in FDI could somewhat be offset, said Carney. A drop may be “compensated by more short-term capital flows which would…be attractive potentially by changes in the level of sterling and changes in the levels of interest rates, in other words, a higher-yielding environment.”
HSBC said in a note last month that if there were “a sudden stop in capital inflows the U.K. might require a larger fall in sterling and a recession (to choke off import demand).”
In that case, “the BOE might need to raise interest rates to stabilize the currency and attract foreign capital inflows.”
Higher interest rates tend to make a country’s currency more attractive.
Separately, a downgrade of the U.K.’s creditworthiness by credit agencies if Brexit were approved could push investors to sell U.K. bonds, which in turn would drive up the yield on such debt.