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Brexit poses risks to UK current-account deficit

London - Brexit without access to European Union markets could exacerbate the UK’s near-record current-account deficit, according to Fitch Ratings.

“Long-term, it is possible that, with the right deals negotiated, the UK retains its access to EU markets and, by extension, its status as a global financial center,” James McCormack, Global Head of Sovereign Ratings at Fitch, said in an emailed report. In this scenario, Britain’s future balance of payments may be no cause for worry, he said.

“Another, less favourable, scenario sees the UK without EU access, and with a diminished role in global finance,” McCormack said. “Direct investment could stop, or reverse, and the current-account deficit would be funded largely by external borrowing. Rising external debt would not be a positive development.”

The vote to leave the EU has heightened concerns about the current-account balance, with economists warning that foreign investors may be less willing to finance the shortfall by buying UK assets. It could leave Britain increasingly reliant on what Bank of England Governor Mark Carney has described as “the kindness of strangers.”

The current-account deficit - the difference between money coming into the UK and money sent out - stood at £32.6bn in the first quarter, or 6.9% of economic output. That’s just below the record 7.2% seen in the previous three months. It was 5.4% of gross domestic product for 2015 as a whole, the largest since records began in 1948.

Stephen King, senior economic adviser to HSBC, said on Tuesday some foreign investors have only invested in Britain because the UK is a member of the EU single market and Brexit risked losing that funding.

“If people have been investing in Britain to be part of the single market and Britain is no longer part of the single market, there is every chance that foreign companies - Japan, the US and elsewhere - would choose no longer to invest in Britain,” he said in an interview with Bloomberg Television’s Francine Lacqua. “That means you have a black hole in your current-account deficit.”

However, even without EU access and global financial center status, it is possible that UK funding issues do not materialize, Fitch’s McCormack said.

While uncertainty surrounds future trade terms with the EU - the destination for almost half of British exports - the current-account deficit could narrow as a weaker pound boosts exports and stronger growth in the euro region delivers investment income, some economists say. Carney said last month that BOE policy makers expect the UK’s current-account deficit halving in the next three years.

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