Brexit will be terrible for Africa’s largest economies

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Brexit will be terrible for Africa’s largest economies

12:06 CAT | 24 Jun 2016

Reuters / Time to go

African economies, already struggling from slowing demand from China and flat commodity prices, have now been thrown into confusion along with the rest of the world as the United Kingdom votes to leave the European Union.

“Many emerging market and frontier asset markets will come under pressure,” Razia Khan, chief economist for Africa for Standard Chartered Bank, tells Quartz. “Much will depend on how quickly some sort of financial market stability can be restored.”

The UK’s minister for Africa and advocate for leaving James Duddridge has promised that relations with the continent would only improve without the burden of the EU but Africa’s largest economies are likely to suffer from economic uncertainty, falling trade, and lower remittances.
South Africa’s rand and trade

South Africa’s already battered economy may be the worst affected by Britain’s exit from the EU. As it became clear the UK vote had swung toward leaving, the rand plunged during early morning trading, becoming the worst performing currency after the British pound. As of mid-morning the rand had fallen 7%, its steepest single-day decline since the 2008 financial crisis.

Along with their peers on the London Stock Exchange, major South African companies dual-listed in London and Johannesburg are being hammered. South Africa’s close financial ties to the UK could be a problem—British banks claims on South African entities account for 178% of South Africa’s foreign currency reserves, according to analysts from UniCredit.

Economists also worry that trade between Africa’s most industrialized economy and the UK will suffer. (The UK is the fourth largest destination for exports from the country, according to data from Bloomberg.) Economists at the South African university, North-West, have said Brexit could take 0.1 percentage points off of the country’s annual economic growth, which already contracted 1.2% in the first quarter of this year.

Nigeria: bad timing

Britain’s exit from the EU couldn’t have come at a worst time for Nigeria, Africa’s largest economy. At a time when the government is trying to fix an economy on the brink of a recession by removing strict currency controls and also liberalizing oil prices, the immediate effect of Brexit will test the nerves of Nigeria’s economic managers as global markets plummet.

Bilateral trade between Nigeria and the UK, currently valued at £6 billion and projected to reach £20 billion by 2020, will be disrupted as trade agreements made under the auspices of the EU will have to be renegotiated.

“For Nigeria, global risk aversion as well as a softer oil price is likely to mean that new portfolio inflows are slow to materialize,” says Khan. “This may delay the normal functioning of the newly liberalised FX market.”

Data from the National Bureau of Statistics shows the UK as the largest source of investment in 2015. A slowing British economy and its reverberating effects could signal a drop in investment, trade and also remittances from the diaspora, valued at $21 billion in 2015. Reduced inflow from Britain will not necessarily be plugged by the rest of the EU, say Lagos-based economist Tunji Andrews. “The EU will be looking to strengthen it’s internal ties, plus there’s cheaper oil from Iran, cheaper labour from China and the eastern block. There’s really nothing we have as a competitive advantage to them right now.”

Away from the economics, the Britain’s EU exit is already fueling similar calls for referendums in the union. Within hours of the vote, leaders in France and Holland, Italy and Denmark have called for similar referendums. These sentiments will be shared in south-east Nigeria where much of the past year has been spent quelling violent protests by activists advocating for secession and establishing an independent country called ‘Biafra’. These activists may now be emboldened having already called for a referendum earlier in the year.

Kenya’s cut flowers

Kenya biggest concerns include capital flight as investors seek safe havens like US treasuries, falling exports, and pressure on the Kenyan shilling. “It’s going to affect all of us and there’s no insurance, no position we can take to maneuver ourselves to be in a better position,” central bank head Patrick Njoroge, said last month of the possibility of the UK leaving Europe.

For now, the bank says it is prepared, with foreign reserves of 560 billion Kenyan shillings ($5.6billion), enough to cover five months of imports. A weaker Kenyan shilling will make imports more expensive for a country whose import bill has been increasing more than 10% a year over the last five years.

One of Kenya’s top exports, cut flowers, could suffer, according to the Kenya Flowers Association. Over a third of the EU’s cut flower imports come from the East African country. The UK and the Netherlands, another country threatening to leave the EU, are the top destinations for Kenyan flowers. If a trade deal between the East African Community and the EU is stalled, Kenya is looking at a loss of 4 billion Kenyan shillings a month, according to the association.

Renegotiating trade deals is likely to “create more uncertainty for Kenyan exports,” according to Razia Khan of Standard Chartered. Falling demand as a result of an economic slowdown or return to recession in the UK and the EU would also be bad for Kenyan trade.

But it’s not all bad news. Kenya’s ties with Britain are deep and longstanding so it may be somewhat insulated from the impacts of Brexit and in some ways could even benefit, according to analysts.

The UK may be eager to establish bilateral ties after leaving the EU, giving Kenya some leverage.
‘Outwardness’

Other countries are bound to be affected as well. In Egypt, the main stock index fell 1.3%, and investors are worrying about a loss of British investment and demand for Egyptian exports.

Analysts also question how Brexit will affect the EU’s support of agricultural subsidies, which critics say have hurt African farmers. The UK has been one of the bloc’s most staunch opponents of these subsidies.

Khan says African countries may have less access to international capital markets and big infrastructure projects may have to be put on hold.

More broadly, analysts from Brookings Institution worry about how Brexit will affect engagement with Africa. As head of the G8 last year, the UK pledged to double aid to Africa. The UK has been the largest funder to IDA17 (the concessional borrowing window at the World Bank).

The think tank concluded in a blog post, “Perhaps the biggest impact of the Brexit on Africa would be the end of British “outwardness”—the country’s concern with and responsiveness to global development issues.”

By: Lily Kuo, Yomi Kazeem

Source: Quartz Africa