Published Editorial

Brexit will impact world economy: Mark Weinberger

June 2016

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CNBC-TV18

By

Mark Weinberger
Global Chairman & CEO, EY

Below is the transcript of Mark Weinberger's interview with CNBC-TV18's Shereen Bhan

Q: Let me start by asking you about what you see as far as global growth is concerned. It continues to be extremely uncertain, we don’t know whether Brexit is going to happen or not happen, we don’t know what Janet Yellen is going to do because the job's data is clearly confusing at this point in time. What are you watching out for?

A: Those are some of the many. It is absolutely correct. The uncertainty is very high and if you talked about it in the past, you got Brexit and what that may mean for investors in and out of UK and Europe.

Q: Are you running a Brexit poll? Everybody else is.

A: We are waiting to see what happens like everyone else is. You have got the US election, you have got the elections around the world. You have got prices of oil going up and down, commodities and China slowing. The difficulty is trying short-term to figure out where you should be positioning yourself but the entrepreneurs were here and the best businesses around the world aren’t distracted by all that noise. They are looking longer-term, seeing where the signal is not the noise and seeing where the big trends are, where they need to be investing for the longer-term, those are the one who are going to be successful.

Q: Where is capital headed? India is the exception. We are growing at about more than 6.5-7 percent and in terms of foreign direct investment, it continues to be a strong inflow. What is your sense about the strength of India and when you talk to investors, is India the preferred destination today?

A: India is still one of the top destinations in the world and it is FDI as you said is continuing to increase. Some of it is the caps that have been lifted on investments, in the retail, e-commerce space, we are in the urban as well as the world spaces now, there could be investors directly investing in India, more infrastructure as the country moves towards more reforms on a tax front, a lot of optimism and so people who are looking at long-term are looking at India, we all know it is happening a little slower than maybe everyone thought two years ago when the excitement was so great, everyone said we are going to see immediate returns, that is not the case but that being said, relative to everywhere else in the world, India's finances, its economic situation, its investment climate is still very high.

Q: We were talking about the Brexit and we don’t know which way it is going to go, we will find out on the June 23. But if there were to be a Brexit, do you think that that is going to change the dynamics both in terms of inflows and outflows even to emerging markets for instance?

A: Any uncertainty like that would hit the entire world. Anybody who is looking at that and you have a major change in the eurozone for the first time in so long in the European union, what would that mean for Greece, what would it mean for France and Italy and Spain and what would it mean for the other countries. That that would hurt the global economy right away. It wouldn’t last forever because people figure out what to do once it happens but I do think that the uncertainty and the contagion it could have would cause investors to say, wait a minute, let us see how this sorts out before we invest fully in capex which has already been going down for four years.

Q: What about the Fed? Do you get a sense that perhaps we are going to see a move anytime soon or do you think that what has happened on the job's front may put a pause at least on the Fed's plans?

A: It is hard for anyone to predict what the Fed does. Federal Reserve would like to get back to normal monetary policy. They would like to start slowly raising the rate again and so fiscal policy and business acumen will drive how the growth is going to happen, where the jobs are going to come from. We are not seeing inflation though anywhere across the world. So I would think that the Fed wants to go ahead and increase with the Brexit vote coming up in June, with the jobs report data you pointed out most recently it is very disappointing, it is going to be a negative rate for them on that decision.

Q: You talked about the US elections. How are the markets reading the possibility of Donald Trump in the White House?

A: I don’t know. The markets right now continue to be fairly strong. Today is a little bit of a down day but they have been going up for the last several weeks. I think what the markets are looking for, no matter who is in the office is the candidate kind of will be able to work for the other side of the political aisle, for people around, they are going to try and do things to get past all of this negativism, all of this criticism, all the arguing back and forth and say what constructively can we do for the next four years to rebuild the economy, to create jobs. That is what people are going to looking for till the election and then right after the election, what are the early signals from whoever the president is going to be.

Q: Going back to India, Prime Minister Modi was in the DC addressing the joint session of the US Congress making the same sort of pitch about India and the US being natural allies, strategic partners, democracies and so on and so forth but beyond the outreach and he has managed to woo investors to come and relook or revisit the India story, companies like Amazon, incremental investment of another USD 3 billion taking the total allocation to about USD 5 billion but what more perhaps are investors looking to the government for?

A: Prime Minister is terrific at explaining his vision for India and Made in India and all the different projects he has got going at. What investors are looking for now is the ability to follow through and the execution of real infrastructure creation of real reforms into the financial markets of a tax system that has laid up by the Finance Minister to lower rates overtime and to reform the goods and services tax (GST), all these things have been on the table and as we look to future elections of course the Prime Minister's party only controls the Lower House. As he gets more support, the hope is these will start to come to reality. So I think a lot of people will like what the Prime Minister says, we do need to see the reform start to take root.

Q: Let me ask you about tax and I don’t know if you have been following what is happening with Mauritius-India double taxation avoidance agreement (DTAA) but we have now seen that being amended and this is part of what we are seeing happen across the world, this crack down as far as tax avoidance is concerned, tax havens, how do you see that changing the tax landscape not just in India but around the world?

A: That is more uncertainty because what is happening is as you are pointing out different countries are instituting their ways to deal with the base erosion of profit shifting and India has come up with its own approach and they deal with the Mauritius taxes treaty. The certainty of having these new rules is good. They are going to increase taxation and foreign direct investment in India to some extent.

So that is a reality but they are also aiming to try and do away with that double non-taxation and what is happening is the courts and the administrative officials were waiting in and applying it haphazardly. With clarity of rules and knowing exactly what companies need to do and consistency of all, that is very important for India than anywhere else. So this will bring some consistency in clarity.

Q: You won't deter investment from coming in?

A: I don’t think over the long-term — it depends how they are going to be enforced, there are these new GAAR rules that are also taking place there. How they are going to be enforced. As you know in India we have got the history of companies being challenged retroactively, the Prime Minister did a great job at trying to say that won't happen anymore, that we are going to see over the next couple of years whether that will be true or not.

Q: When you talk to investors who are looking at the real India opportunity and yes reforms need to be executed on the ground but there was a lot of talk about defence, it is moving slowly and those are sectors that typically move slowly, oil and gas now seems to be one of the sectors that the government wants to try and join investors after a long hiatus, what are the sectors that look exciting from an investor point of view at this point in time?

A: You have to think consumer products and retail, the number of people certainly young people in India and how they are growing. That is huge, infrastructures, big opportunities for helping government to pull out infrastructure in India that is huge. Energy is going to be huge as cities are built and urbanisation takes place, defence will be an issue, telecommunications and technology as we have increased usage around different parts of India going hopefully from the urban to the rural areas. There is untold opportunities across landscape because of the population growth and the low cost of energy there is as opposed to everywhere else in the world because we are importers of a low gas prices and oil prices as opposed to exporters that are being hurt.

Q: Rajiv Memani, a short while ago he was talking about 2016 is going to be a good year as far as deals are concerned for India but what about globally, do you believe that we are going to see some big ticket M&A action?

A: Whatever he says is true. We have done a study called the Capital's Confidence parameter globally and more than 50 percent of the companies in the world are looking to do deals still. That doesn’t mean that they are all going to get done, government is coming and disrupting them. What you are saying is a lot of Chinese companies now investing outbound into Germany, acquiring German companies, US companies, they have had some USD 100 billion in outbound investment, which is large. You are seeing inversions that the whole issue of US companies try to get better beneficial tax systems in foreign acquisitions of US companies and you are seeing companies, which are merging for growth, they are merging because they need to disrupt themselves and have new business models. We do see it and our business in advising on mergers and acquisitions is going through the roof. It is incredible how busy we are. So we do know these deals are under works.

Q: The top three challenges that you are most worried about today?

A: Uncertainty, uncertainty, uncertainty.