Ireland is country 'most vulnerable' to Brexit shockwaves

Luxembourg and the Netherlands also top rating agency S&P's Brexit Sensitivity Index

A sightseeing barge travels on a canal in Amsterdam, Netherlands, on Monday, March 25, 2019. Amsterdam is the latest European city to try to get a grip on its buy-to-let housing market as it seeks to stop a wave of landlords from capitalizing on booming property prices. Photographer: Geert Vanden Wijngaert/Bloomberg

Ireland is the country most vulnerable to trade and migratory aftershocks from a potential Brexit, with Luxembourg and the Netherlands following close behind.

“Ireland’s 499-kilometre border with the UK encourages vigorous trade in merchandise and services, as well as substantial migratory flows between the two countries,” according to S&P Global Ratings' latest Brexit Sensitivity Index (BSI), published on Monday.

The rating agency's first edition was published on June 9, 2016, just after the UK voted to leave the European Union.

Ireland’s financial sector’s exposure to the UK is also the fourth highest of all 21 economies studied in the index this year, reflecting the size of Irish banking subsidiaries operating in the UK. However, the Irish banking system has reduced its UK footprint in recent year and continues to do so, the report noted.

At 8.5 per cent of its gross domestic product, Ireland exports more goods and services to the UK than any other sovereign on the index, and deep supply chains extend between Ireland and Northern Ireland, most notably in agricultural and food processing.

Meanwhile, the number of Irish residents in the UK and vice versa totals 16.7 per cent of Ireland’s population, S&P said, citing official data from both countries. The figure is twice that of the next largest bi-directional migratory figure – 8.5 per cent for Malta, according to the report.

“Given all of these connections with the UK, there is little doubt that a no-deal Brexit would represent a sizeable shock to Ireland's small open economy,” S&P said.

“Nevertheless, we would expect that Ireland’s highly flexible economy would reorient trade toward even larger trading partners, such as the remaining EU countries and the US.”

Ireland is also well placed to attract some displaced foreign direct investment from a post-Brexit Britain, for example UK-based financial subsidiaries that sell services in the EU market, it said.

The BSI measures export of goods and services to the UK, bi-directional migrant flows, financial sector claims on UK counterparties on an ultimate risk basis, and foreign direct investment in the UK (excluding by special purpose vehicles).

The Netherlands moved up four places since the 2016 index to become the third most vulnerable economy to Brexit. This was on account of the fact that between 2015 and 2018, Dutch exports to the UK increased by nearly 0.6 per cent of GDP and the country's banks carry high exposures to UK counterparties.

Luxembourg is the second most vulnerable country, according to S&P, due to its sizeable claims on UK financial institutions and high exports, as many companies redirect via the tax haven for tax purposes.

The British Parliament on Monday will hold a second round of indicative votes on various Brexit alternatives, and the customs union could emerge as a preferred solution for lawmakers who have rejected Prime Minister Theresa May’s deal.