Global Daily – No-deal Brexit still looks unlikely

by: Bill Diviney , Aline Schuiling

UK Politics: Chance of No-deal is still low, but Brexit uncertainty has increased – UK Prime Minister Theresa May announced a delay to the parliamentary vote on her EU withdrawal deal yesterday afternoon, in a move that was widely flagged by media sources this morning. The vote was originally scheduled to take place today. The move is not entirely surprising, as opposition to the deal had if anything continued to increase as the vote approached, although the goal of the government in delaying the vote is not entirely clear. The Prime Minister referred to wanting to seek ‘assurances’ from European Union negotiators on the temporary nature of the Northern Ireland border backstop, which is the biggest bone of contention in the deal (as it stands, the UK cannot unilaterally withdraw from the backstop, which is viewed as a major loss of sovereignty). However, as the responses to the Prime Minister’s statement in parliament indicate, it is unlikely that ‘assurances’ – with no legal weight – would be enough to assuage the concerns of those opposed to the deal.

One possibility is that this is a tactical manoeuvre by the Prime Minister to ‘run down the clock’ closer to the 29 March Article 50 deadline, in order to scare MPs into voting in favour of the deal, given the alternative default position is a chaotic no-deal Brexit. This could prove a risky strategy for the Prime Minister, as one way parliament could block a no-deal Brexit is through a vote of no confidence in the government, which would lead to a general election. The 29 March deadline could then theoretically be extended while elections take place.

At the same time, support continues to build for a new referendum to break the deadlock in parliament. Should the delay in the vote not be more than a few weeks, and the deal is still rejected by parliament (as is very likely), then parliament could make amendments to the government’s response to force a new referendum on EU membership to take place. The 29 March deadline would then also need to be extended while the vote take place. Overall, we continue to think the chance of a no deal Brexit has fallen, and the chance of a remain outcome has risen. However, uncertainty over the precise course of events is likely to persist in the near term.  (Bill Diviney)

Euro Macro – Belgium politics, global sensitivity to see sovereign underperformance – The Belgium nationalist and conservative party N-VA (currently holding 31 of the 150 seats in the Lower House) decided to leave the Michel-I coalition government this weekend. The trigger was the party’s disapproval of the UN migration pact (the ‘Marrakech pact’).

New elections were planned to take place on the same day as the European Parliament elections, which are on 26 May 2019. According to reports in the Belgian press, no early elections have been planned and prime Minister Michel is going to lead a minority government (the Michel-II government), which has only around a third of the seats in the Lower House left. Parliament still has to approve the 2019 budget. In case the budget will not be approved, the government will have to stick to the rule that every month it can spend exactly the same amount as in the same month a year ago.

Belgium’s government finances have improved significantly during the past few years. The government’s debt ratio has peaked at 107.6% GDP in 2014 and has subsequently fallen to 103.4% in 2017. The forecast for this year is that it will decline to around 101%, which is well below the levels of the countries in the periphery, slightly above France (around 99%) and higher than the eurozone total (around 87%). The budget balance has improved from -4.2% GDP in 2012, to -0.9% in 2017. The forecast for 2018 is -1.0%, so well below the EC’s 3%-limit. A failure to  pass the 2019 Budget should not be a significant issue for meeting the target, however the economic slowdown could be a more significant threat (as tax revenues disappoint).

Belgium’s economy is relatively sensitive to changes in global trade and the global business cycle, as the share of goods exports in GDP is amongst the highest within the eurozone. This means that the Belgium economy will be hit relatively hard by the current slowdown in global trade. It would also be hit relatively hard by a disorderly Brexit, though that is not our base case.

The government bonds of Belgium were not impacted by the news over the weekend. However, given the political risk and the economy’s sensitivity to global trade developments, we expect Belgium sovereign bonds to underperform compared to other semi-core government bonds over the coming months. (Aline Schuiling)