Late Thursday afternoon, a reporter called to ask what I thought would be the consequences of Brexit to Brazil. Other than some short-term volatility in asset prices, nothing significant should happen, I replied. Brazil is already in deep economic trouble, it got there by itself and whatever Brexit could add would not change things significantly. And, I added to myself, Brexit will not happen anyway. What a surprise when I woke up Friday morning to find out that the UK was leaving the EU!
Was I equally mistaken about the consequences of Brexit to Brazil? I don’t think so. As expected, on Friday the real dropped against the dollar, as did most other currencies, and the stock market plunged, like everywhere. However, Brexit didn’t change the fact that the outlook for the Brazilian economy depends more than anything on the government’s success to implement its fiscal agenda. With Brexit, Brazilian companies may find it even harder to roll over their foreign debts, which hasn’t been easy anyway. However, the real bad news of the week in this area was not Brexit, but the bankruptcy of Oi, Brazil’s largest telecom, with almost $ 20 bn in debt, half of which is owed to foreign bondholders. Nothing important should happen through the trade channel either. The UK accounts for just 1.5% of Brazil’s exports, which in turn add up to a modest 11% of GDP. For Brexit to impact Brazil through this channel it would have to severely harm the UK’s economy.
What scares me about Brexit is what it says about the political risk of a slow-moving economy going through an era of technological change that has increased income inequality and alienated large segments of the working force. As noted in the FT, the “vote reflected a roar of rage from those who felt alienated from London and left behind by globalization.” Observe the contrast between prosperous London and Scotland, which backed REMAIN, and working-class towns, seaside resorts & rural England, which voted to LEAVE (see figure below).
Source: Financial Times.
Brexit will embolden populist, divisive parties across Europe. It will also cause investors to reassess the odds of Donald Trump being elected president in the upcoming US election, another likely source of market turmoil this year. Things will be different after the vote in UK this week. Perhaps, very different. As Paul Davies remarked in the WSJ, the “biggest risk of Brexit is that it is a signpost along a road toward declining international trade, less free movement of capital and a continuing global economic cooling” (see here).
Why, I ask myself, did I fail to predict Brexit? Of course, the polls are partly to blame, for they indicated that Remain would win by a small but solid margin. However, that’s only part of the story. Probably equally important is that I preferred to view the evidence as I would like it to be: in favor of the Remain option. I wonder how much of that is also true of other things at stake in the world nowadays.
 The OECD estimates that Brexit will shave off 3 percent of UK GDP by 2020. Assuming an elasticity of 1 and that Brazilian exporters wouldn’t manage to send their goods elsewhere, this would reduced Brazil’s GDP by an estimated 0.005%.