Like a thick fog in a swamp

The immediate effect of Britain’s decision to leave the EU has been shocked markets. What will Brexit do to Africa in the longer term?

The only certainty in all of this is uncertainty. Uncertainty on the markets and uncertainty over the future of trade relations between the UK and Africa. The most internationally traded African currency, the rand, is already having a volatile time of it. Measures of implied volatility for emerging markets, which are gauges of how currencies are expected to swing, are already breaking recent records. For its part, the rand has at the time of writing lost more than 8% against the dollar, though it has gained against the tumbling pound.

Not great for a currency that’s already lost 21% against the dollar so far this year. Other African currencies are more insulated from the tempests on the international money markets, but there will be knock-on effects.

While some of the fall in the rand is technical and caught up in the falls in other emerging market currencies, a Brexit does worry many when it comes to the economy. Last week economists at North-West University predicted that Brexit would shave 0.1% off SA’s GDP. If, as some forecast, the UK falls into a technical recession, that could reduce trade and investment between SA and the UK. And the UK is SA’s fourth-largest trading partner. Likewise, if a UK recession triggers a fall in consumer demand in Britain, other African exporters could be affected too. For example, exports of Kenyan roses could fall as UK consumers demand fewer of them.

The UK’s trade deals with Africa are essentially the EU’s trade deals with Africa. As the UK exits the EU, all those deals will have to be renegotiated. That could take years, leaving trade relations between the UK and Africa in very uncertain noman’s land. But the UK can, and in the interests of stable relations probably will, simply keep the same trade deals with its African partners.

However, the world of trade negotiations is akin to a marshy swamp covered in a thick fog. It’s tricky to see what’s ahead and to the side, and it’s a challenge to navigate through, making outcomes even harder to predict.

Some say a UK free from the EU will be keen to improve its trade relationships with its Commonwealth partners. Others say that even though it will still have to do business with the EU, it will really set its sights on China.

There may be some unintended consequences as well. In terms of development aid, Brexit raises another question mark. The UK has pledged 0.7% of its gross national income (GNI) to development aid. It probably won’t go back on that promise. But if the UK goes into recession and the GNI falls, the amount of money for aid will be reduced in real terms. More than this, the UK was one of the biggest supporters of EU aid programmes in Africa, both politically and financially.

While the UK will most likely continue to honour its own aid commitments, a changing attitude to aid could evolve within a UK-less EU. The same principle applies to the EU’s Common Agricultural Policy (CAP).

For years, African farmers have criticised the CAP for the subsidies it affords European farmers. The UK was possibly the loudest voice for CAP reform within the EU. With a UK outside the EU, how the CAP goes forward could raise concerns for Africa’s farmers.

But in the short term, there will be some glimmers of light for a handful of African companies. For example, SA’s gold mining companies may enjoy a happier short-term run. The uncertainty has made the gold price soar. But more than that, their costs are in rand, while the gold they sell is in dollars, so with a falling rand against the dollar, there may be some wry smiles in the short term at least.

Finance minister Pravin Gordhan has been quoted as saying that if the UK exits the EU, “the volatility and uncertainty could have a serious impact on us as a country”. Until the fog of panic clears and waters calm, that will hold true, not only for SA, but for the continent as a whole.