NZ sheepmeat, tourism may be hardest hit by Brexit as pound weakens, market volatility jumps

New Zealand's sheepmeat exports and tourists from the UK may be the hardest hit from the Brexit with the most immediate impact likely to be on British tourists suddenly finding the spending power of the pound against the kiwi is the weakest in almost three years.

The European Union is the biggest market for New Zealand sheepmeat, taking $1.4 billion of product last year and almost half of that 228,000 tonnes of quota is taken by the UK. Total red meat exports to the EU amount to $2 billion, making it the single most valuable market. However, the biggest impact for New Zealand would be the UK's loss of zero-tariff access for its own sheepmeat into Europe, where it currently sends 90 percent of production, leaving more in its domestic market.

But no immediate disruption to trade is expected. Trade Minister Todd McClay, who is seeking meetings with trade ministers from the UK and the EU at the G20 meeting in Shanghai on July 9-10, says negotiations between the UK and EU member states to leave the regional trade bloc could take two years and commentators are "suggesting that a final Brexit could be five or six years away."

A more immediate impact may be felt by the tourism sector, given the British pound's slump against the kiwi. The British pound is currently buying NZ$1.89, down from about NZ$2.07 early on Friday NZ time. That means a British tourist has lost 17 cents of spending power per pound in just four days. The UK was the fourth-biggest source of tourists in the year ended May 31, at 213,040, behind Americans at 255,344, Chinese at 394,582 and Australians at 1.42 million.

For New Zealand, "the real economy impacts (are limited) but probably negative for meat exporters and tourism operators at the margin," said Stephen Toplis, head of research at Bank of New Zealand. "Commodity prices (are) under pressure, except gold lifting as it's seen as a safe haven."

Moody's Investors Service lowered the outlook on the UK's Aa1 credit rating to negative from stable, which said that nation may face lower economic growth and will now endure a prolonged period of uncertainty. The pound tumbled against most currencies including a slump to the lowest in more than 30 years against the greenback.

The weak pound against the kiwi dollar will have little immediate impact for commodities sold on long-term contract or for meat exports in particular, given how far through the current season is.

"The key thing, particularly for this season, is that the vast majority of lamb would have already been exported to the EU," said Andrew Burtt, chief economist at Beef + Lamb. "Already two-thirds of that lamb for the season ending Sept. 30 has been exported."

There's also the lag of shipping as meat sent last week won't arrive in the UK or the EU for six to eight weeks, he said.

New Zealand was already watching the impact of the pound on UK demand because its strength prior to Friday's slump had meant British lamb wasn't competitive on the continent and more had remained in the UK domestic market, Burtt said. "These things don't tend to be perfect substitutes," he said.

(BusinessDesk)