Thursday 19 October 2017

What Irish firms need to do next to battle the Brexit headwinds

Feargal O’Rourke pictured in Dublin
Feargal O’Rourke pictured in Dublin

Feargal O’Rourke

There is no doubt that the Leave vote by the UK electorate caught many by surprise and has caused turmoil in the markets since. There are all sorts of new risks emerging that businesses now need to tackle, not least the impact of sterling exchange rate fluctuations. What is clear is that it will be a long time before any decisions are made as the full impact of the vote emerges.

From an 'Ireland Inc' perspective, while many business leaders may be feeling less confident, it is important to remember that we remain part of the EU and the huge market that this presents and this will not change. Ireland's economy is strong, performing at well above the eurozone average, our Foreign Direct Investment (FDI) flows continue and we have a very highly skilled and talented workforce. We have improving health in our public finances, our unemployment is falling, consumer confidence is picking up and our indigenous economy is showing signs of growth. Lots of positives but now with a very significant headwind of Brexit.

Businesses need to plan for the short-term and long-term risks now presented by Brexit, planning for every scenario and be prepared for any systemic changes that may occur. Recognising that much of this is planning for unknown variables, it is advisable to consider a Brexit Task Force where all eventualities are reviewed and sensitivities are determined.

Of course, Brexit will impact different sectors in different ways, but there will be common threads. The extent of exposure to the UK market and sterling is the key immediate risk.

Some of the short term factors for consideration include:

Establishing the short-term financial impact of sterling exposure:

l Identify sterling foreign exchange exposure. What is the impact on margins and how much can margins deteriorate before profits are eroded?

l Identify any contracts in sterling and the margin impact for different levels of Sterling exchange movements. There may be exit clauses to be considered,

l Consider any forward contracts / hedging the business may have.

Longer term considerations:

l Consider the financial impact of any potential trade barriers and /or tariffs.

l Consider additional administrative cost burdens.

l Consider regulatory changes, with consequences around regulatory capital and costs.

l Supply chain arrangements, physical and virtual including routes to market.

l Consider your financial statements and any additional disclosures you need to make regarding new business risks.

l Changes in business models, for example, location, branches and subsidiaries.

l Customs and trade and new administration, for example, new customs requirements.

l Taxation changes across corporation tax, VAT and duties as well as cash flow implications of upfront VAT payable at point of importation of goods from the UK.

l Tax and legal entity structures across the UK and other European locations.

l Legal issues, for example, invalid contract clauses.

l Intellectual property and data privacy may also be areas impacted.

In the longer term, workforce mobility and freedom of movement of people, including work permits and educational qualifications, may also be impacted. A bilateral agreement with Britain giving Irish citizens special status in the UK is by no means certain and would need the approval of the European Union.

Business systems may also have to change - or at least to be capable of coping with change. This is because continued trading with the UK, once the exit negotiations have been agreed, may require businesses to manage new administrative requirements when either importing or exporting goods or services from/to the UK. If the existing systems are not likely to be adaptable for those changes, plans and budgets for further capital expenditure may be needed.

The biggest issue of all is uncertainty on every level. While lists can point to areas of potential concern no one can yet bottom out what the potential scenarios will be. So in practical terms you need to:

l Make this is a management team / board issue - they need to be tracking the readiness plans

l Appoint a designated Brexit champion - someone who goes 'on point' for all Brexit issues

l Do a threat assessment for your organisation - using lists like the one above shape out where you think the potential exposures may be

l Evaluate the potential impacts

l Start scenarios planning where the impact or the potential options make that viable

Above all stay informed as this situation develops - read the press, engage with your industry bodies and talk to your professional advisors.

Ireland should make every effort to play its role in the continued evolution of the EU and be at the EU negotiation table engaging in the discussions to ensure the potential outcomes of any discussions are in the best interests of Ireland, our people and our economy. This should include, where possible, working with the British government to secure a mutually acceptable deal with the EU.

It will be a long time before any concrete decisions are make and it is hoped that the current volatility will settle and some normality will return to the markets. In the meantime, now more than ever before, staying close to trading relationships in the UK is crucial including customers and suppliers. The strength of these relationships will be important in choppy waters and uncertainty.

Many Irish businesses have come through the worst recession in decades and have shown great resilience. I have no doubt that, with the right strategy and help, Irish businesses will navigate these uncertain waters and emerge stronger than before.

Feargal O'Rourke is Managing Partner at PwC

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