Cameron exit sends UK towards investability vacuum

June 24, 2016

The author is a Reuters Breakingviews columnist. The opinions expressed are his own. 

David Cameron’s impending exit as Britain’s prime minister propels the country towards a potential investability vacuum. He and his chancellor, George Osborne, represented the stability and solid economic management that made the UK the top destination in Europe for foreign investors until recently. It’s too bad for the economy and domestic assets that both men staked their career on staying in the European Union. There are no obvious successors who fit the bill.

Cameron said he was the wrong person to steer the UK towards its chosen path of leaving the EU, though he gave his party until October to find a successor. Arguably, it is Osborne who lost the referendum, not least because of a long series of austerity budgets and misjudgements on tax and welfare reforms. It is unlikely that he can retain his role for long after Cameron stands down.

Cameron and Osborne have focused on a budget-balancing quest. No matter how pointless, this goes down well with foreign investors. Central banks around the world raised their holdings of sterling by 44 percent during 2015, to $332 billion, and the yield on 10-year gilts is just 1.1 percent, even after the shock referendum result. Britain needs short-term and long-term capital flows to plug its current account deficit, which hit a record high of 5.2 percent of GDP in 2015. Credit ratings firms already have Britain in their sights after the vote.

Consider China, which invested $3.3 billion into the UK in 2015, according to Baker & McKenzie – more than twice what it allocated to Germany. Its investors have ploughed money into real estate, regulated assets like water utilities, and have offered to invest in nuclear power plants. Those contributions may not always be welcomed by the public, but the UK sorely needs infrastructure funding. Besides, consumption follows: Chinese tourists increased in number by 30 percent last year.

The question is, who will clean up the mess once Cameron leaves. Boris Johnson, a leader of the Leave campaign, is known internationally. But as a member of the London elite, he may not be well suited to unite a divided electorate. Michael Gove, currently justice secretary, and Theresa May, the home secretary, are possible. But neither has a strong track record of economic management. While Cameron has, at least, given time for a successor to be groomed, UK assets look less alluring to a foreign eye.

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