Rabobank says no to Scottish independence

18 September, 2014

Rabobank, the Dutch-based cooperative food and agricultural bank, believes the short term impact on the scotch whisky industry will be negative.

In its industry notes #455, titled ‘Going Scot-Free’, it says: “Rabobank believes that on balance, the overall short-term impact on the industry will be negative. Scotch businesses could be impacted in five key areas: access to export markets, foreign exchange, interest rates, taxation and input costs.”

It says the EU accounts for 37% of scotch sales. It suggests that the scotch industry will face impeded access to EU markets as a result of the (temporary) loss of EU membership and the accompanying loss of EU free trade agreements with member states.

“Although Scotland would be expected to re-apply for EU membership, admission would probably not happen any sooner than 2018, it says, “leaving the scotch sector at risk of seeing higher import tariffs in its core markets for at least two years.

As a result, scotch could face increased competition from other spirits categories and might lose competitiveness in key EU markets.

Some have suggested following Norway’s example and joining the European Economic Area (EEA) and the European Free Trade Association (EFTA). This would give Scotland full access to the EU market, but would not require EU membership. The one caveat to this option is that it would require Scotland to accept and implement EU regulation while forfeiting all influence on it, which could prove to be a sensitive issue in a newly independent country.

Rabobank says a second challenge could be the loss of the Geographical Indication (GI) status, which protects the geographical origin of scotch under EU law in member states. As a result, the industry could face an increase in copycats and counterfeit products in the EU and abroad. To counter this threat, the Scotch Whisky Association (SWA) recently announced membership of the Organisation for International Geographic Indications Network (oriGIn), which could support the protection of scotch within the EU in the case of independence.

Out of the top ten export markets for whisky in 2013, seven were non-EU and access to these markets would also be limited by the loss of EU trade agreements.

Rabobank says the Scottish government would have a mountainous task in procuring new trade agreements with these export markets following independence—without the support and international muscle of the EU or the UK. Furthermore, the scotch industry would lose the on-the-ground support and marketing of UK embassies around the world, which has been of great importance to the success of scotch according to many in the industry.

“The future of the GBP currency union will be shrouded in uncertainty if Scotland chooses independence,” states the report. “Although the Yes-camp is expecting Scotland to be able to maintain the pound sterling, the main UK political parties have thus far ruled out any such suggestion. The alternatives for Scotland would be keeping the pound sterling, but relinquishing influence on monetary policy; joining the euro; or introducing a new currency with a pound sterling, euro or even dollar peg. It is highly likely that each of these options would lead to an increase in foreign exchange risk for Scotch exports, which could lead to serious pricing issues for Scotch businesses and could have an impact on margins, as most of the export sales of Scotch are currently denominated in GBP.

Rabobank says in an industry that is built on long-term strategic decisions, with inventories being held for up to 20 years, rising interest rates can create a serious challenge. In the event of independence, it is expected Scottish country risk will increase, causing interest rates to rise. This will result in rising investment and carrying costs and make long-term planning decisions much harder.

While multinational companies like Pernod Ricard and Diageo might remain largely unaffected by a rise in Scottish risk premium, the effect on local players could be more significant.

The plans of the Yes-camp to lower corporation tax by as much as three percentage points under the UK tax rate is good news for the scotch industry. It would improve margins and would increase competitiveness with other whisky producers outside of Scotland. However, the reality could be different. There are worries that the Scottish government might be forced to introduce higher taxation for the scotch industry—one of its highest grossing sectors—to plug part of its fiscal gap in the years following independence.

The report says the scotch industry also faces the potential for increased volatility in input costs as a result of the loss of EU subsidies for Scottish farmers. The EU Common Agricultural Policy (CAP) currently provides price support to barley farmers in Scotland, but this support would most likely disappear if Scotland becomes independent. It is uncertain whether Scottish farmers will be able to produce sufficient amounts of barley without this support from the EU, which could force Scotch producers to pay more for local barley or source their barley from other markets.

“The results of the Scottish independence referendum still remain very much uncertain, as do the possible effects of independence on the scotch industry. In our opinion, possible short-term benefits of a yes-vote are small, while the downside risks are significant. “However, the exact impact of independence will be as much determined by the actions of the Scottish government following the vote, as by the vote itself,” concludes the Rabobank report.

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