Brexit tremors reverberate through Africa
The UK is a major investor in and trade partner with this continent, so their fates are linked
ALL THE QUEEN’S MEN: Household Cavalry Life Guards ride in procession along the Mall in London for the Trooping the Colour ceremony. The UK accounts for 15% of all South African trade with the EU BRITAIN’S Prime Minister Theresa May this week finally served divorce papers on the EU, kicking off two years of uncertainty as the parties negotiate a final parting.
When the UK chose to hoist the Union Jack in preference to a future in the EU in June last year, global markets went into a tailspin as the world considered the implications for trade, policy and investments.
Immediately after the exit referendum, Goldman Sachs warned of a drop of 2.75% in GDP for Britain over the 18 months after the referendum, but the Brits have shown early signs of resilience.
However, the rubber truly hits the road with May signing article 50 of the Treaty on European Union, triggering Brexit.
Some fear Brexit may have a negative effect on Africa, where according to Barclays Africa analyst Peter Worthington, growth halved to just 1.4% last year, the slowest pace in decades. There was a sharply weaker growth outlook in Angola, Nigeria and South Africa, which together accounted for nearly threefifths of sub-Saharan GDP.
The continent’s growth is multitiered and multipaced, suggesting that the impact of Britain’s departure from the EU will not be uniform, particularly when it comes to trade and investment.
The UK accounts for 15% of all South African trade with the EU. Nigeria is the EU’s secondbiggest African trading partner, followed by Kenya.
According to the UN, the EU (including the UK) is South Africa’s biggest trading partner, accounting for about 26% of South Africa’s merchandise trade.
“The UK is African nations’ second-biggest export partner in the EU after the Netherlands,” said Alisa Strobel, senior economist at research and data-analytics company IHS Markit.
“The short-term implications of the Brexit developments are related to a weaker sterling that is going to have an impact on UK imports, such as cut flowers from Kenya.”
Foreign direct investment, remittances and development aid constitute the largest component of financial flows into the continent.
The UK’s Office for National Statistics shows that in 2014 UK foreign direct investment in CONCERNED: British Prime Minister Theresa May has sent a delegation, including Foreign Secretary Boris Johnson, to Africa in the wake of Brexit Africa amounted to £42.5-billion (about R707-billion), of which 29.8% was directed at South Africa. Mining and financial services got the lion’s share of total foreign direct investment in Africa, accounting for 54.4% and 34.3% respectively.
However, IHS Markit expects that UK direct investment, which is focused on commodity extraction and the energy sector, should endure and that the commodity price outlook, among other factors, is likely to play a more important role in investment planning than Brexit developments.
A slowdown in the UK economy would reduce global demand for commodities, which would have the effect of lowering commodity prices further, which in turn would reduce the UK’s return on mining investments — ultimately widening its current-account deficit.
“It is still valid that the wide current-account deficit leaves the UK vulnerable,” said Brian Hilliard, chief UK economist at Société Générale — this after the rate of return on mining and quarrying assets fell from 6.5% in 2014 to 1.9% in 2015.
Brexit will also have a direct impact on remittances — the money that migrant workers send home. The sharp fall in the value of the pound since the Brexit vote means that migrants’ remittances are worth less at home.
To illustrate, on June 23 2016 (voting day), £1 was equivalent to R21.49, and on Friday, the pound was worth R16.65.
The Financial Times found that remittances globally were worth up to four times the value of development-aid assistance, which demonstrates how critical they are for low- and middle-income countries. Nigeria and Kenya would be the subSaharan countries most affected, with remittances to them from the UK in 2015 amounting to £3.7-billion and about £500million respectively.
This of course makes it quite clear that what happens in the UK has meaningful implications for sub-Saharan trade and that we ought to dig into the detail in order to understand the complexities.
Bilateral trade between Nigeria and the UK was estimated at £6-billion and had been expected to reach £20-billion by 2020.
However, falling oil prices on the back of lower global demand drove the Nigerian economy into recession in 2016, an economy where oil revenues account for 70% of government income.
The IMF predicted last year that the Nigerian economy would plunge into recession as a result of Brexit.
Similarly, Kenya’s fresh-rose industry would come under significant pressure as a result of Brexit. The UK is Kenya’s second-largest market after the Netherlands.
So any snag about arriving at new trade agreements with Kenya could result in serious losses for this industry — it could cost as much as $40-million (about R535-million) a month, according to the Kenya Flowers Association.
In June last year, the SADC signed a new partnership agreement with the EU — the Economic Partnership Agreement.
The EPA is a major free-trade agreement to facilitate trade between SADC and EU members. The deal was signed just before Brexit, meaning that SADC will have to go back to the drawing board with the UK to draft a new trade agreement.
British high commissioner in South Africa Judith Macgregor hopes, however, that the UK and SADC can effectively transpose the terms of the EPA into a new agreement between the two regions.
Macgregor notes that the EPA that SADC signed with the EU did not include elements on property rights and the liberalisation of services, such as are present in most recent trade deals.
She believes this presents an opportunity for the UK and SADC to agree on more progressive and beneficial terms.
Theresa May has reiterated that Brexit from Europe does not mean Brexit from Africa.
She recently sent a delegation to Africa consisting of Foreign Secretary Boris Johnson and Africa Minister Tobias Ellwood to meet several state dignitaries. There may therefore be a silver lining to a trade agreement stemming from Brexit.
A World Bank report highlighted the fact that China has become the African continent’s most important trading partner, with that country now accounting for 27% of exports from sub-Saharan Africa, with 23% going to the EU, 21% to the US and 9% to India.
This creates an important economic buffer for the continent in the wake of increased geopolitical risk and its impact on African economies.
Brexit from Europe does not mean Brexit from Africa Brexit will also have a direct impact on remittances to workers abroad
Comment on this: write to letters@businesstimes.co.za or SMS us at 33971 www.sundaytimes.co.za