FOLLOWING the UK’s surprise vote to leave the EU, analysts have assessed the probable impact such a departure would have on African trade, investment, and security policy. The UK vote to leave the EU was based on a non-binding advisory referendum and does not guarantee the UK’s departure from the EU. However, months of political uncertainty throughout Europe will rattle global and African markets.
‘If the UK does leave the EU, the impact on many African economies will be short-term and relatively insignificant. The UK will have two years to renegotiate trade agreements with African countries,’ says South Africa business risk intelligence firm, EXX Africa, in a detailed assessment of Brexit’s impact on Africa.
‘Any trade deals that the UK has in place with African countries are essentially trade agreements with the EU, which has exclusive jurisdiction over its members’ trade deals. Any exit from the EU could terminate the UK’s access to the EU’s single market, forcing the country to negotiate new trade accords with African countries, which is likely to be a cumbersome and lengthy process. It is however likely that the UK would leave many existing trade agreements in place and thus mitigate risk of trade disruption.’
The firm analyses two key drivers of risk, firstly the impact of a ‘Brexit’ on existing trade and other arrangements with the EU, and secondly the longer term effect of a probable economic slow-down of the UK economy, which is the fifth largest in the world with substantial ties to the African continent.
IMPACT ON SOUTH AFRICA
The South African economy is now more likely to fall back into recession and extreme currency volatility indicates that a downgrade of its credit rating to non-investment grade in December is now almost inevitable. Bi-lateral security cooperation and aid programmes face less disruption.
The South African economy is the most exposed to the global economy and in particular its currency is the most volatile among its emerging market peers. South Africa is reliant on foreign capital to finance its wide current account deficit. Additional fears of euro-scepticism in other EU countries have also stoked fears that South Africa’s trade with the EU is under threat. South African exports to the EU reached over $14.2 billion in 2015. However, the impact on the South African economy would be short-lived and relatively manageable. In a worst case scenario, where the UK economy were to shrink by 5 percent and UK imports were to drop by 10 percent, South Africa’s economic growth would fall by only 0.1 percent, according to research by North West University.
South Africa’s finance minister Pravin Gordhan has said that the country’s treasury and the central bank wouldtake any additional measures to cope with the implications of the ‘Brexit’ vote, while South Africa’s President Jacob Zuma has assured markets that South African banks and financial institutions could withstand the shock, as demonstrated during the 2008/09 global financial crisis.
According to research by Unicredit, UK banks’ claims on South African companies account for 178 percent of South Africa’s foreign currency. South Africa’s already volatile currency and a probable recession further would increase the prospect of a downgrade of the country’s credit rating to non-investment grade by December. The longer term implications would lead to weak growth, higher inflation and interest rates, as well as extensive capital flight.
According to Bloomberg, the UK is South Africa’s fourth largest export destination, mostly dominated by metals and agricultural goods. The bulk of these exports have duty-free access to the EU under the terms of the Trade Development Co-operation Agreement. The trade terms with the UK will now need renegotiation and revision, which could take up to two years, and significantly impact investment in key industries such as mining and agriculture.
Moreover, South Africa is a member of the Southern African Customs Union (Sacu), which is dominated by asymmetric trade with South Africa. Other Sacu members, i.e. Botswana, Namibia, Lesotho, and Swaziland, will similarly be affected by the trade renegotiations with the UK. South Africa’s trade and industry minister Rob Davies has offered UK companies that stand to lose their duty-free access to EU markets a base in South Africa, thereby continuing these companies’ access to the EU through the EU-SADC Economic Partnership Agreement (EPA), which includes six countries of the Southern African Development Community (SADC).
IMPACT ON NIGERIA
The effective implementation of a new foreign exchange mechanism and liberalisation of the fuel sector will face fresh hurdles as the UK withdraws from the EU. Nigeria will also struggle to attract interest in new debt sales aimed at financing its expansive budget.
The main impact of a ‘Brexit’ on Nigeria would be further deterioration of the country’s already struggling economy, which has been caused by the fall in global oil prices and a steep drop in local crude production due to an insurgency in the Niger Delta. There is extensive trade and security cooperation between the UK and Nigeria that would be likely to face several years of disruption as the UK departs from the EU. Nigeria is the UK’s second-largest export market in Africa. Bilateral trade between the two countries is currently worth $8.3bn and projected to reach $25bn by 2020. The UK is also Nigeria’s largest source of foreign investment, with assets worth over $1.4bn. Moreover, UK-Nigerian remittances account for $21bn a year. The UK is also one of the largest development assistance donors to Nigeria, although Nigeria is not as aid-dependent as most continental counterparts.
A slowing UK economy on the back of a departure from the EU and potential disruption as the UK renegotiates its trade agreements, would be likely to reduce trade flows, foreign direct investment, and Nigerian remittances. There is also no guarantee that other EU countries will make up the UK shortfall in trade and investment, as other EU countries look to Iran for more reliable access to oil and to Asia for cheaper labour. On June 24, Nigerian stocks ended a three-day rally, falling 1.4 percent over worries of Britain’s vote to leave the EU. Nigerian banks, such as Fidelity Bank and Zenith Bank, recorded the biggest losses. Nigerian stocks had previously rallied 8.5 percent after the government floated the naira and ended a highly controversial currency peg.
The liberalisation of the fuel marketing sector and the proposed introduction of a flexible exchange rate are both aimed at soothing foreign investor concerns and to attract new fundraising to finance a record budget deficit widened by a fall in oil revenues. The effective implementation of the new currency regime and establishing its credibility will be key to attracting new foreign direct investment and portfolio flows. Finance minister Kemi Adeosun is due launch a planned eurobond sale later in 2016. The government plans to raise $10bn of new debt of which $5bn would come from foreign investors. Much of this planning would be delayed as risk averse investors steer away from Nigerian debt.
IMPACT ON KENYA
Kenyan markets were relatively stable following the ‘Brexit’ vote, although any disruption in EU trade negotiations would negatively impact the cut flowers export market. It is likely that the UK would prioritise trade negotiations with Kenya, which could even benefit Kenya and other EAC members.
Kenyan officials were quick to respond to the market turmoil followed by the UK’s vote to leave the EU. Finance minister Henry Rotich assured investors that Kenya has adequate foreign exchange reserves to absorb any shocks from the crisis. Kenya has $5.6bn in foreign reserves, which amounts to 5 months of import cover, which is higher than the four months the country usually holds. The central bank also said it would be ready to intervene in money and foreign exchange markets if required. Such assurances steadied the impact on the Kenyan shilling, but some banking stocks still suffered losses. Equity Bank and Co-operative Bank were down over 2 percent on June 24, while other stocks were unchanged.
However, there is a risk of capital flight from Kenya as risk averse investors seek safe havens. This would weaken the shilling and increase import costs. Kenya’s import bill has steadily increased by more than 10 percent over the past five years. Another key concern would be that ongoing negotiations of a trade agreement between the EU and the East African Community (EAC) would be delayed as the EU copes with the UK’s departure.
The Kenya Flowers Association expects any such delays would cost the Kenya flower industry $38 million per month. Horticulture is a primary export market for Kenya and over one third of the EU’s cut flower imports, mostly to The Netherlands and the UK, are derived from Kenya. However, it is likely that the UK would prioritise trade negotiations with Kenya given the two countries’ long-standing bilateral relations. Such negotiations could even benefit Kenya and other EAC countries, as Kenya gains leverage over setting trade terms.
Although a series of diplomatic disputes have strained British-Kenyan relations over the past few years, Kenya is likely to feature as the UK’s principal destination for emerging market investment. Despite diplomatic disputes, Kenya is likely to remain a preferred beneficiary of British foreign investment in agribusiness (tea, tobacco) and in oil and gas, with the UK being instrumental in the development of Kenya’s region-leading financial sector.