OCBC OneWealth App– Please sir, can I have a Brexit deal?

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Please sir, can I have a Brexit deal?

22 October 2019

In brief

On Saturday, the UK Parliament voted to withhold approval of Mr Johnson’s Brexit deal until all accompanying legislation to implement it is in place. The so called Letwin amendment triggered the Benn act, which forced Mr Johnson to request for a 3-month extension of the Brexit deadline from the European Union (EU).
Mr Johnson begrudgingly complied, but not without attaching a second letter arguing for the EU to reject the request so as to force the Parliament to vote through the new deal by 31 October. The EU has not announced its decision.
Despite the parliamentary setback, Mr Johnson has pledged to exit the EU by the end of this month by possibly rushing through his deal through Parliament again this week. Whether this can be done would depend on Commons Speaker John Bercow's approval. As it stands, government agencies and departments in the UK are taking the necessary precautions to cushion the economy from potential worst-case outcomes.
The British Pound fell on Saturday's news, ending a four-day winning streak. But this might be short-lived as the Letwin amendment decreases the risk of a no-deal Brexit (contingent on an approval for the extension by the EU), even as it prolongs the period of Brexit uncertainty.

Hope

On Saturday morning, UK Prime Minister Boris Johnson was hopeful. The outcome of the vote on his Brexit deal was on a knife’s edge, but early indications pointed to a very narrow victory. Narrow or not, a win is still a win. Yet, little did he foresee that a simple amendment could unravel all hope and inflict more disorder in his already chaotic Brexit plans.

Mr Johnson’s political manoeuvrings over the past weeks, from his failed attempts at proroguing the Parliament and calling for snap elections to the expulsion of Tory party members who had outrightly stood against him, had eroded what little goodwill was left among opposition MPs. Many were suspicious about Mr Johnson’s intentions and were clearly uneasy about his openly cavalier attitude towards a no-deal Brexit. After all, Mr Johnson has said that he will deliver Brexit, “do or die.”

Insurance

To block the path to a no-deal Brexit, the Benn act was introduced as an insurance policy. The legislation forced Mr Johnson to seek a three-month Article 50 extension from the European Union (EU) should he fail to deliver an acceptable Brexit deal by 19 October. After some last-minute haggling with EU negotiators, he finally delivered a deal. MPs were expected to vote yay or nay on this newly brokered agreement at a historic Saturday sitting in the House of Commons, a first in 37 years.

Suppose the deal went through. This implies the shackles of the Benn act is effectively removed and 31 October becomes a hard deadline for Brexit, as Mr Johnson has repeatedly said that he will not ask for an extension on his own volition. But a meaningful vote on the hastily prepared deal is not quite the end of the story. For the Brexit deal to become law, the UK Parliament must vote on all legislation surrounding it. The fear is that the UK Parliament might fail to pass the necessary implementation legislation required to put the deal into law by 31 October, careening the UK towards a catastrophic no-deal Brexit. Some MPs had characterised such an outcome as an “accidental” no-deal Brexit. Others were less generous in their descriptions, suspecting the possibility of some legal jujitsu during votes on implementation such that the UK is shoved out of the EU without so much as a legally binding deal in place.

Enter Sir Oliver Letwin, a fellow Conservative who was unceremoniously expelled from the Tory Party by Mr Johnson. Sir Letwin tabled his namesake amendment for a vote on Saturday. Simply put, the amendment withholds Parliamentary approval of Mr Johnson's Brexit deal until all accompanying legislation to implement it is in place, which as of Saturday, were not. A vote for this amendment would immediately trigger the Benn act, forcing Mr Johnson to request a 3-month extension of Article 50. This would give Parliament enough time to scrutinise the deal and pass all necessary legislation to support it.

The amendment was akin to taking out additional insurance coverage to ensure that the UK does not crash out of the EU under any circumstances. It also underscores a sense of distrust of Mr Johnson and Brexit hardliners leading his government.

Let(win) down

On Saturday, the Parliament approved the Letwin amendment, 322 to 306, effectively turning the meaningful vote on the Brexit deal into a meaningless one and crucially damaging the momentum for his agreement.

It also forced Mr Johnson to do the one thing he reviled – send a letter to the EU requesting for an extension. Bounded by law, he duly discharged his duties, but not without attaching a second letter deriding the first, arguing for the EU to reject the request.

Extension

The ball is now in the EU’s court. As per previous requests, extending Article 50 requires the approval of all 27 member nations. The EU does not have to give an immediate answer and European Council President Donald Tusk will likely spend the next few days consulting with EU leaders about their appetite for a further Brexit delay.

If the EU refuses the request, the UK Parliament has until 31 October to pass the deal and all associated legislation required. This would be playing along with Mr Johnson’s “my deal or no deal” strategy. Choosing this course of action, however, comes with a great deal of political risk for the regional bloc, not least because they will have to shoulder the burden of blame should a no-deal Brexit come to pass. The political calculus suggests that an extension seems likely.

The silver lining is unlike Mrs Theresa May’s deal, which was voted down thrice with decisive margins, Saturday’s vote was not necessarily an outright rejection of Mr Johnson’s deal, as those who voted for the amendment are not inherently opposed to his agreement. It is merely a postponement of its ratification. The EU will watch intently the progress of the deal as it moves through the House of Commons in the successive days before possibly deciding on the duration of the extension.

MPs are expected to closely examine Mr Johnson’s deal and vote on a series of amendments to it next week. However, Mr Johnson’s government has promised to call for a meaningful vote on all necessary legislation for his withdrawal agreement as early as Monday or Tuesday. Much will depend on whether the House Speaker will allow the government to go ahead with its plans. As it stands, the situation is extremely fluid and uncertain.

Uncertainty

Assuming the EU responds favourably to the UK’s extension request, the Letwin amendment effectively eliminates the prospect of a no-deal Brexit outcome on 31 October. This would be a short-term positive for the Pound.

Yet, while the Letwin amendment eliminates the risk of the UK crashing out of the EU without a deal in the near term (contingent on the EU’s approval of the extension), it also prolongs the period of Brexit uncertainty which has been hampering UK’s economic prospects.

Given these countervailing forces, the Pound could struggle to sustain its near-term surge, although the downside would be limited if the odds for a Brexit deal improved. In our view, the UK leaving the EU with a deal remains the most likely outcome, although this might not necessarily happen by 31 October.

As far as extensions go, a short one to deliver Mr Johnson’s deal would not make much difference to the Pound.

However, in view of a fractious parliament, a lengthy 3-month extension could introduce the possibility of no-confidence votes, snap elections and a second referendum to resolve apparent divisions in the House of Commons. Indeed, there are many political paths one could take if only afforded the time. This introduces more uncertainty and could lead to a turbulent Pound ahead as investors react to every headline suggesting a potential risk of a no-deal Brexit.

But let’s not go there. As it is, even an extension is not entirely assured for now.

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