UK “Not as we know it” if Scots say “Yes”

Scotland’s future will be decided on the 18th September

Ahead of the September 18th referendum, recent polls have agreed that the momentum is with the SNP.

The first TV debate (5th August) won decisively by Alistair Darling marked the high water mark for the Unionists “Better Together” campaign. The second debate resulted in momentum building for Independence. The UK government’s “Better Together” campaign must make their case ahead of the vote.

The quality of the debate has been weak. Business leaders have claimed to have been pressurised by the Nationalists to stay out of the debate and quiet on the risks. The SNP claimed they had legal advice supporting their thinking about Scotland’s position in the EU before it was revealed they had not received legal advice.

The details and fine print about future pensions, currency, share of the national debt, central bank/ central bank reserves, fiscal policy have not been credibly answered by the SNP. The SNP claim an independent Scotland would be able to use sterling notwithstanding the explicit rejection of this notion from all three major Westminster parties. This is understandable. No-one knows the precise answers now and everyone is flying blind on the details if the answer is “Yes”.

What is clear Scotland would have to reapply for EU membership, negotiate their accession, and joining the EU would involve a unanimous vote of approval from EU member states. When Commission President Jose Barroso made the legal reference points clear, the SNP claimed he was talking “nonsense”. The SNP has now picked up on the complexity of the EU issue apparently via press comment.

The “Yes” vote’s “Big Mo”

Source: YouGov

In the end the referendum vote is an emotional decision for most voters – many of whom will be younger voters less concerned about the economic factors. It is a chance for change and it will be meaningful change. The result will depend on the floating voter and is likely to be very close.

GDP impact and “uncertainty”

A Scottish departure would longer term, probably not make much difference in pure GDP terms – the UK economy currently c $2.44trn GDP includes an 8.8% Scotland ($216bn GDP) component. Assuming 3.2% Q2 GDP growth persists – by 2017 the remaining United Kingdom would have recouped the “loss” of Scotland.

However it would introduce a lengthy period of uncertainty as key issues were decided.

Key areas of negotiation/ uncertainty that would influence the sovereign debt rating of the UK and Scotland:-

• Will the Coalition and PM David Cameron survive a “Yes” vote? this is arguable.
• Division of North Sea Assets (c 90% of North Sea oil is located in Scottish territorial waters) – a key uncertainty.
• Division of UK government debt and other UK liabilities -the SNP has argued that the UK debt is payable by the UK Treasury i.e. the guarantor of the terms of the UK debt. It has disputed whether Scotland would be liable for any UK debt.
• Division of the basic pension/ welfare – the UK would be liable for NI payments made up until independence. What welfare alternatives would be available?
• Currency – the SNP believes Scotland can use sterling but all three major Westminster parties have said Scotland could not use sterling if it becomes independent.
• Power – the SNP plan to abolish Ofgem and replace it with a new regulator this will impact Centrica, SSE, National Grid.
• ”Too big to fail” – how would Scotland would manage the issue of potential exposure to the balance sheets of RBS? RBS is likely to want to move its HQ from Scotland to the UK
• EU membership and Eurozone/ use of the UK “opt out” provisions – Scotland would have to make a fresh application to join the EU.
• The Trident nuclear base in Faslane in the Firth Of Clyde – the SNP objects to having nuclear weapons in Scottish territory.
• International Relations / United Nations – a white paper on independence suggested Scotland might need to open 100 embassies abroad. The SNP is thought to want to share diplomatic efforts with the UK

A “No” vote would preserve the status quo with the carrot being the provisions of the Scotland Act 2012 adding powers to the Scottish Parliament including the ability to raise/ lower income tax by 10p, control of stamp duty and landfill tax and the creation of Revenue Scotland – a tax authority to replace the HMRC. Assuming the No vote wins the reward with be greater devolution of power to the Scottish parliament.

What sectors would be impacted ahead of separation?

A “Yes” vote would have the largest short-term impact on the Fund Management and Utilities sectors though this will abate over 2014/15 as key uncertainties are clarified.

What companies would be impacted ahead of separation?

In reviewing the impact on relevant listed blue chip companies, it is apparent that the Scottish referendum is a major issue for 2014/ 2015 in the event of a vote in favour of independence. That impact would abate over time as key uncertainties are clarified. Companies can mitigate their exposure, move their HQs and engage in tax arbitrage.

Possible approaches in the run-up to the 18th September 2014

With just 10 days to go……the Scottish referendum looks like a binary bet. Our expectations for the immediate run up period are as follows:-

Our expectation is the period in the run-up to the vote will be very volatile, poll sensitive and with heightened political risks.