BREXIT: When Europe fights

The UK’s exit from the EU rocked world mar­kets, ex­pos­ing SA to the pos­si­bil­ity of a deeper eco­nomic crisis

CityPress - - Business and Tenders - DE­WALD VAN RENS­BURG de­wald.vrens­burg@city­press.co.za

South Africa’s vul­ner­a­ble econ­omy could be placed at greater risk of re­ces­sion af­ter the shock news on Fri­day of Bri­tain’s de­ci­sion to exit the Euro­pean Union (EU). A large cur­rent ac­count deficit and neg­a­tive eco­nomic growth mean the coun­try can be tipped into a re­ces­sion – de­fined as two con­sec­u­tive quar­ters of neg­a­tive growth – which would ad­versely af­fect jobs.

The Brexit is un­likely to de­ter the SA Re­serve Bank from con­tin­u­ing to put in­fla­tion above eco­nomic growth.

“There are three trans­mis­sion chan­nels through which the Brexit can hit South Africa: the mar­kets, trade and the cur­rency,” said Rian le Roux, chief econ­o­mist of the Old Mu­tual In­vest­ment Group.

“Firstly, there are the mar­kets. When­ever there is a global shock, in­vestors move straight to the safest as­set, which is a US bond,” he told City Press.

All that money flow­ing into the US bond mar­ket comes from some­where – emerg­ing mar­kets across the world shook on Fri­day as cap­i­tal flight set in.

South Africa is par­tic­u­larly vul­ner­a­ble to out­flows be­cause the coun­try has a large cur­rent ac­count deficit.

This means it needs money to con­tinue flow­ing into its fi­nan­cial mar­kets to keep the rand steady.

Ac­cord­ing to Neil Shear­ing from Cap­i­tal Eco­nom­ics, a UK-based re­search con­sul­tancy, South Africa has a num­ber of weak­nesses that can ex­pose it to Brexit dam­age if things do not calm down rel­a­tively soon.

If cap­i­tal flight con­tin­ues, “economies with large ex­ter­nal fund­ing re­quire­ments – no­tably, Turkey and South Africa – could be forced to raise in­ter­est rates”, he said.

“As­sum­ing the dust set­tles in fi­nan­cial mar­kets, the fall­out should be lim­ited.”

South Africa also falls among those emerg­ing mar­kets with bank­ing sys­tems that have a rel­a­tively high de­pen­dence on short-term fund­ing in the cap­i­tal mar­kets.

On this score, South Africa joins Malaysia and Turkey in be­ing par­tic­u­larly ex­posed to mar­ket trou­ble, said Shear­ing.

The fact that the rand did not drop even fur­ther on Fri­day came as a sur­prise to many.

“The rand was sur­pris­ingly sta­ble. It fell in the morn­ing, but then re­cov­ered,” said Le Roux, who was quick to point out that “it is early days, though”.

South African bond yields – de­fined as the rate of re­turn on gov­ern­ment debt – shot up sharply on Fri­day morn­ing from 8.86% to 9.1%.

How­ever, the rand re­cov­ered sig­nif­i­cantly through the day, af­ter plum­met­ing in the morn­ing.

It started the day at about R14.37 to the dol­lar, then fell to R15.68, be­fore later re­cov­er­ing to R14.89.

The JSE All Share in­dex fell as much as 5.4% on Fri­day be­fore be­ing last quoted down 3.4% just near the close.

The sec­ond chan­nel through which South Africa could feel the Brexit is through slower eco­nomic growth.

A slower global rate of growth will ul­ti­mately hit de­mand for local ex­ports, growth and jobs.

In­vestec econ­o­mist Annabel Bishop said that for this year, the bank was fore­cast­ing that South Africa could grow by just 0.2% – down from 1.3% last year.

In the first quar­ter, the local econ­omy con­tracted by 1.2%.

Slower growth will also un­der­mine South Africa’s credit rat­ing, which is at the bot­tom of the in­vest­ment­grade scale.

Le Roux said that the ur­gency to speed up local growth-en­hanc­ing struc­tural re­forms had just been ratch­eted up an­other notch.

A more di­rect ef­fect on South Africa’s econ­omy comes from the Bri­tish pound’s de­pre­ci­a­tion on Fri­day, when it fell 4% against the rand.

It also fell 8% against the US dol­lar and 6% against the euro, which could se­ri­ously dam­age its im­me­di­ate eco­nomic prospects.

If this sticks, the Bri­tish will pay more for every­thing they im­port and lose the com­pet­i­tive­ness of their ex­ports.

The UK rep­re­sents about 18% of all tourists vis­it­ing South Africa, and they may well stop com­ing, said Le Roux.

The UK also makes up 4% of all South Africa’s ex­ports to the world, but 20% of South Africa’s ex­ports to the EU.

Its im­por­tance is, how­ever, com­pletely dis­pro­por­tion­ate for a num­ber of South African sec­tors, es­pe­cially fruit ex­porters.

The UK buys 10% of South Africa’s ex­ported wine, 10% of ex­ported cit­rus fruit and 21% of ex­ported grapes.

The UK will have two years to ex­tri­cate it­self from the EU, but the Brexit will ul­ti­mately com­pletely up­set in­nu­mer­able in­sti­tu­tional set­ups around the world.

For the UK, main­tain­ing its trade ac­cess to the rest of Europe would be the num­ber one con­cern, but its re­la­tion­ship to ev­ery other cor­ner of the world is now also un­cer­tain. Ger­hard Eras­mus, a trade law ex­pert at Stel­len­bosch Univer­sity, echoes this. The Brexit blows a hole in the new trade deal, which the EU and South Africa signed only two weeks ago. “We just con­cluded this Eco­nomic Part­ner­ship Agree­ment, and the UK was a big part of that,” said Eras­mus. But, he added, “there is no im­me­di­ate ef­fect”. The part­ner­ship agree­ment – con­cluded be­tween the EU, the five-mem­ber SA Cus­toms Union and Mozam­bique – is set to re­place the tradere­lated parts of South Africa’s stand­ing EU deal, namely the Trade and De­vel­op­ment Co­op­er­a­tion Agree­ment. Ac­cess to the UK mar­ket is an im­por­tant part of both deals, but will now no longer be part of the pack­age. The same prob­lem is go­ing to come up with the part­ner­ship agree­ments that the EU has signed with the other re­gional African blocs. Na­tional Trea­sury re­leased a state­ment re­lat­ing what could pos­si­bly fill this trade agree­ment void, say­ing the UK had sev­eral op­tions. Trea­sury seems to be hop­ing for one par­tic­u­lar op­tion open to Bri­tain: to join the ex­ist­ing Euro­pean Free Trade Area (Efta) for non-EU Euro­pean states. This gives the UK back its ac­cess to the EU mar­ket, with South Africa also ben­e­fit­ing since the cus­toms union al­ready has an agree­ment with Efta. The UK could also sim­ply choose to pur­sue bi­lat­eral trade deals on its own – some­thing it has not done for decades. In­vestec’s Bishop said that the EU would in­creas­ingly fear fur­ther ex­its by its mem­bers.

PHOTO: GETTY IM­AGES

TREP­I­DA­TION A trader sits at his desk watch­ing the day’s per­for­mance board, show­ing a dive in the value of the DAX in­dex of com­pa­nies at the Frank­furt Stock Ex­change the day af­ter a ma­jor­ity of the Bri­tish pub­lic voted to leave the Euro­pean Union

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