What if... Scotland votes for independence?

by Peter Bartram

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04 Aug 2014

  • Financial Director
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ilovescotland

WHISKY IS SCOTLAND's MOST FAMOUS EXPORT. But if there is a yes vote in the referendum on Scottish independence on 18 September, it is the whisky industry itself that could be needing a stiff drink.

"I would have an overall high level of concern about the business environment that we'd be entering," says Mike Younger, finance director of Ian Macleod Distillers, whose brands include single malts such as Glengoyne and Tamdhu. "There would be a huge amount of uncertainty about many of the things that we take for granted."

Other distillers are believed to hold similar views, even though many have been less forthright in expressing them for fear of a backlash from the wilder elements of the Yes campaign.

But it's not only Scotland's distillers who are concerned about what happens if the country cuts its links with the UK. Other industries have been issuing clear warnings that independence would not usher business into the promised land described by Scotland's first minister Alex Salmond.

Royal blues

Richard Prenter, chairman of engineering firm MacTaggart Scott, which won a £13m contract to build aircraft elevators in the recently launched HMS Queen Elizabeth aircraft carrier, believes independence is not a "responsible choice" for the company. Its oldest customer – going back more than 100 years – is the Royal Navy, and the navy never builds warships in a foreign country.

Even many FDs south of the border reckon that an independent Scotland would fail to boost business. Steve Rafferty, FD of high-growth logistics company Baxter Freight, headquartered in Nottingham, suggests that eventually part of the firm's growth strategy will involve opening branches. But he says: "I think anybody considering investing in Scotland would find it very difficult to justify that investment because there are so many uncertainties."

It is difficult to find any FD who has a good word to say about independence. Even the Yes campaign was unable to produce the name of an FD supporter who was willing to talk about the benefits of going it alone, despite being given two opportunities to do so. But perhaps that's not surprising, considering the long list of issues that will land on FDs' desks if Scotland breaks away from the UK.

Give currency

Take that most basic of all business questions – which currency an independent Scotland would use. It seems probable that an independent Scotland would initially continue to use the pound, but whether that would be inside or outside a currency union is not yet clear. However, the UK's three main political parties and Bank of England governor Mark Carney have all warned against the dangers of currency union.

"No currency union certainly creates uncertainty for business," says Lindsay Gardiner, chairman of PwC in Scotland. Thousands of FDs, especially in small and medium-sized businesses that have previously traded exclusively within the UK, could find themselves trading in two jurisdictions for the first time. "If you're suddenly dealing with foreign currency for the first time, then you may need additional treasury expertise within the organisation," says Gardiner.

Craig Vickery, head of the ACCA in Scotland, says that some FDs may need to dust off their treasury skills. "But it's not a skill they won't know about," he adds.

Even so, with the rest of the UK, effectively, a foreign country from a currency perspective there will be more issues to confront. For example, managing access to capital. This probably wouldn't be much of an issue for multinationals operating in an independent Scotland, according to Stephen Phillips, a banking partner in the Edinburgh office of international law and tax practice CMS. But it could present more problems for medium-sized and smaller firms that normally look to banks for their capital needs.

If Scotland's currency was shadowing sterling, the government may need to introduce fiscal or monetary measures to maintain its value. "That could impact on borrowing costs," notes Phillips.

Younger is just one FD in the whisky industry who views the uncertainty over currency with concern. He points out that, traditionally, Scotch whisky has been sold around the world in sterling. Currently, 92% of Macleod Distillers' sales are in the pound.

"If Scotland had to adopt its own currency, we would be left in quite a difficult position in terms of what currency we would want to transact in with our customers," he says.

Younger points out that sterling, the euro and the US dollar offer reasonable long-term currency stability but this would not necessarily apply to a new Scottish currency.

"If we had to transact in a new Scottish currency, the exchange rate fluctuations would invariably be pretty dramatic and we would probably then be forced to start selling in the currency of the customer because the customer wouldn't want to take the currency risk," he says.

Then there is the worry of actually switching to a new currency. Younger says: "When European countries migrated to the euro, they had a run-in period of three or four years with fixed exchange rates and they could calibrate their systems in a measured and even-handed way – whereas the Scottish method would result in a fairly abrupt change in the currency."

He points out the company would need to re-designate not only all the financial ledgers but all the systems reporting into them, such as ERP. "It would create a multi-currency issue as well, because some of our purchases would still be from the rest of the UK," he adds.

There is the question of the domicile of bank accounts and whether existing settlement systems, such as BACS, would continue to function in Scotland and whether the country would be included in the forthcoming European payments system, even if it is absent from the EU.

So FDs could be facing considerable costs in adapting to the new currency. "Even if you're taking on additional staff, there is the opportunity cost of dealing with something that's imposed on you and is of no benefit to the business," says Younger. He warns that the extra costs and work faced by Scottish businesses in coping with this new burden could place a temporary brake on economic growth.

We in the EU

FDs north of the border are especially concerned about whether Scotland would become a member of the EU – and when. "I have not heard anyone saying that exclusion from the EU would be a good thing," says ACCA's Vickery. FDs are more worried about how long it would take Scotland to sign up, rather than to considering being out of the EU. New EU Commission president Jean-Claude Juncker has said that the EU should admit no new members for five years to allow time for consolidation of recent signings.

Countries such as Spain, long troubled by Basque separatists, are unlikely to give a new break-away nation an easy ride into membership for fear of encouraging their own independence movements. So Scotland could find itself on the outside of the EU looking in for several years. And that's before even considering the requirement for new EU members to join the euro.

If Scottish companies suddenly find themselves outside the EU, FDs should focus closely on the impact this has on the contractual relationships they have with companies inside the EU, says Gardiner. "You need to answer the question: what's the impact of your business being outside the EU?" he says.

It is not a prospect Younger relishes. About 30% of Macleod Distiller's sales are in the EU. "There would be enormous uncertainty about how one contracts with those countries," he says. In the end, he says, the changes to issues such as how duty payments are handled may be comparatively simple. "The trouble is that getting familiar with the change and implementing it can be very time-consuming for a business," he says.

Losing influence

He also questions whether the whisky industry would lose influence in international bodies such as the World Trade Organisation if Scotland became independent. "Scotland wouldn't have a voice immediately after independence as far as I can see," he says.

The period between a yes vote and Scotland becoming an independent nation in the spring of 2016 would also be a critical time. Gardiner warns that the 18-month transition period may be overtaken by markets. He points out that when Czechoslovakia split into the Czech Republic and Slovakia in 1993, markets reacted overnight. There was a flight of capital to the Czech Republic, the stronger of the two new states.

"I'm not saying that would happen if Scotland votes for independence," says Gardiner. "But FDs will need to be alive to what happens in the markets overnight, not just over an 18-month period."

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