KUALA LUMPUR: The Malaysia-European Union (EU) free-trade agreement (FTA) negotiations will go ahead as scheduled later this year, said International Trade and Industry Ministry secretary-general Tan Sri Rebecca Sta Maria.
Regardless of whether the European bloc has 28 or 27 members (should the United Kingdom vote to leave the EU today), talks will continue.
“We negotiate with the commission and not individual member states,” she told Business Times.
The EU is Malaysia’s largest trading partner and second-largest source of foreign direct investment.
“If the UK leaves, then it will not be part of the agreement and may have to engage us separately,” she added.
On the timeline of the negotiations, she said “both parties were still in the process of re-engaging”.
Sta Maria, who will be retiring next month, will be replaced by Wan Suraya Wan Mohd Radzi as the chief negotiator for Malaysia.
The ambitious trade deal was started on the sidelines of the Asia-Europe meeting in Brussels in 2010 but talks were stalled due to the focus on the Trans Pacific Partnership agreement talks.
The International Monetary Fund (IMF) warned in a report that a decision by UK voters to exit the EU would mean the UK would need to renegotiate trade relationships with 60 non-EU economies where trade was currently governed by EU agreements.
In the long run, the UK would be worse off economically if it were to leave the EU, as higher trade and financial barriers would lead to lower output and incomes, it said.
Meanwhile, economist Julia Goh of UOB Bank said the Malaysian economy would likely face downside risks from potential recession in the UK and derailed recovery in EU. She was referring to an IMF study where it was predicted that output in the UK would be 5.6 per cent lower by 2019.
Malaysia’s direct exposure to UK is relatively small, contributing one per cent of total trade, 1.7 per cent of tourist arrivals and 4.3 per cent of FDI stock.
“We think if UK does exit, companies will have to broaden their direct exposure into this region to make up for the losses via EU trade deals,” said Goh.
Malaysia has a larger exposure to the EU (9.9 per cent of total trade, 2.6 per cent of tourist arrivals and 27 per cent of FDI stock).
“Therefore, a more significant impact will come if growth in the broader EU is affected,” she said in a note, adding that a Brexit outcome would undoubtedly encourage euro sceptics in France, Italy and Spain.
Malaysia’s key exports to the UK are transport equipment (more than 50 per cent), machinery (more than 25 per cent), commodity related and mining.
In terms of services, exports are in the areas of finance, wholesale and transport, information technology and professional services.
On Malaysia’s investments in the UK, Goh pointed out Malaysia’s increased holdings of UK assets, which made up 4.7 per cent of the direct investments abroad.
“Portfolio values will be affected if property prices drop and the pound weakens. For companies, earnings erosion also follow as markets turn jittery. The uncertainty could deter investments in the UK markets.”
However, random checks seem to suggest that if property prices drop and the pound weakens, Malaysians could take the opportunity to increase their exposure given their positive and stable long-term view of UK and the region.
“While Brexit risks the future outlook for UK in terms of the economy, taxation and political priorities, we think it remains a prime destination choice for education and leisure, and Asians will still eye a slice of the property market there.”
Malaysian Institute of Economic Research executive director Dr Zakariah Abdul Rashid cautions about the likely negative impact on Malaysia.
“Brexit will exert negative impact to the Malaysian economy in two channels. Firstly, through real trade and investment flows, which are relatively less significant due to their limited volume.
“The second channel, through monetary flow and finally affecting the sterling exchange rate, may be more pervasive because of its position as a financial centre to EU and the financial sector’s dominance in the UK economy,” he said.
