Treasury Today Country Profiles in association with Citi

‘Scexit’ bad for business?

Single thistle flower against the bright blue sky

According to a new survey, many FTSE 100 chief executives are against an independent Scotland. But what exactly would a break-away mean to companies north and south of the border, as well as those further afield?

September 18th 2014 could go down as the most momentous day in relations between Scotland and the rest of the UK since the signing of the Acts of Union some 300 years ago. In little over 200 days’ time, Scots will go to the polls to vote on whether Scotland should be an independent country. As well as raising questions about national identity, the referendum could also have lasting implications for businesses.

And a growing group of corporates think that a Scottish exit, dubbed ‘Scexit’, does not make economic sense for companies on either side of the border, nor for some of those further afield. While big businesses had previously tried to avoid comment on what is a political matter, many corporates now feel compelled to speak up with the referendum looming.

Bad for business?

In a recent survey by headhunting firm Korn Ferry and the British Retail Consortium, 65% of the FTSE 100 chairmen surveyed said a vote for independence would be “bad for business.” Respondents to the survey included the UK’s ten largest retailers. Those in the retail sector in particular fear the impact on costs of border controls, divergent employment laws and uncertainty over currency and EU membership.

But it is not just retailers who would be affected. Earlier this month BP’s chief executive Bob Dudley weighed in to the debate with his support of keeping the union, claiming an independent Scotland would cause what he called “practical issues”. Debate in the oil sector is further complicated by uncertainty over North Sea oil – it would need to be ascertained how revenues from North Sea fields would be distributed between Scotland and the remainder of the UK.

Some Scotland-based groups have even said they could be forced to leave the country as a result of a ‘Yes’ vote. Recruitment firm Orian Group’s chairman Alan Savage has said uncertainty over currency, trade and tax in an independent Scotland could lead to the company upping sticks and setting up its headquarters elsewhere.

Financial services in Scotland, with access to the UK market and regulatory and tax regimes, would be especially hard hit by a ‘Yes’ vote. TSB Bank has announced it will be based in England rather than its native Scotland, a move which is thought to reflect the retail bank’s concerns over an independent Scotland, and there are fears further Scottish financial institutions could follow.

Standard Life Chairman Gerry Grimstone is expected to set out his opposition to independence later this week when the Edinburgh-based asset manager publishes its annual results. The referendum is a particular worry to Standard Life with regard to its pensions business, which would be impacted by the loss of tax exemption rights and increased administrative costs.

Owen Kelly, Chief Executive of Scottish Financial Enterprise, the representative body for Scotland’s financial services industry, says a ‘Yes’ vote would damage the competitiveness of the country’s financial services sector, beginning “a further period of uncertainty, while negotiations and currency arrangements are put in place, of the kind our competitors will not be facing.”

The Scottish CBI is also against the split, its Director Iain McMillan claiming it would hit all kinds of businesses: “If the people of Scotland vote ‘Yes’ it will have profound and long lasting effects on Scotland’s economy and business, especially businesses who have to trade across the border and with the wider world.”

Currency headache

From a cash management perspective, uncertainty over not only which currency would be legal tender in an independent Scotland, but also how and indeed if monetary policy would be set, is causing a headache for corporates domiciled north of the border and their trading counterparts.

Earlier this month, the three main political parties of the UK warned the remainder of the country would refuse to form a currency union – effectively meaning an independent Scotland would not be able to keep the pound, although the Scottish National Party still claims it would have a right to the currency. This week Scottish First Minister Alex Salmond mooted a ‘Plan B’ – dubbed ‘sterlingisation’, this option would see Scotland use the pound outside a currency union, with no control over monetary policy and no backup from a lender of last resort. The alternatives are the adoption of the euro, or the creation of a new Scottish currency.

Credit ratings agencies may also be tempted to downgrade the UK’s credit rating in the event of Scottish independence, as the UK’s debt burden would rise by around 10%. However, in a move to calm investors, the UK Treasury said it would continue to guarantee its debt. Exactly how national debt would be apportioned in the event of a break-up is currently unclear.

An independent Scotland could also have problems with its wider trade links – European Commission President José Manuel Barroso has said it would be “difficult if not impossible” for Scotland to join the EU.

The case for ‘Yes’

However, there are business leaders who are not completely against the idea of independence. Seventeen percent of the FTSE 100 chairmen questioned by Korn Ferry felt a ‘Yes’ vote would be ‘good’, while 7% said it would be ‘very good’. Ross McEwan, Chief Executive of RBS, which is headquartered on the outskirts of Edinburgh, says the bank could adapt to doing business in both the UK and an independent Scotland in the event of a break-up.

The most recent ‘Scotsman on Sunday’ newspaper poll showed 49% of Scots favoured a ‘Yes’ vote, against 37% on the ‘No’ side. While the ‘Yes’ side is up 5% since the previous poll, as businesses become more vocal about the consequences of independence, public opinion could easily swing towards the ‘No’ camp.

In the six months before the referendum, we can expect to see further rhetoric from Holyrood and Westminster. We are also likely to see more corporates trying to predict the consequences of a ‘Yes’ vote, and if they feel strongly enough, speaking out to influence the Scottish public before 18th September.