by Though the Brexit votes were driven more by concerns about immigration and unease about EU’s domination in Brussels, it has far reaching impacts that go beyond the UK’s borders. The decision to leave the EU has unleashed considerable forces of market uncertainty, with the spillover effects already starting to haunt the global economy. Major currencies plummeted last week and jittery investors took refuge in safest places such as the US dollar, Japanese yen and gold.
The International Monetary Fund (IMF) has already released a new economic projection that the Brexit into 2016 could reduce global growth by 5.6pc in its worst case scenario. With the caveat that nothing is fully clear in the immediate aftermath of the Brexit, there is little doubt about the consequences of referendum’s outcome to the global economy, including Africa’s.
A valid lesson from the turbulence of the past eight years is that financial links transmit economic calamities from one country to another almost instantaneously and often amplify the original shock. The precise impact of the Brexit on the economy of Britain will depend on many factors, including the future trade arrangement it will have with the remaining 27 EU members. Although the vote changes nothing for at least two years, it kicks off what are certain to be complex and arduous negotiations between them.
Currently though, Britain is the most important trading partner for the EU, if the UN trade data are any help to refer to. The EU’s exports to the UK are worth three per cent of the bloc’s GDP, while its imports reach 2.4pc. Although most EU member countries run trade surpluses, they register deficits with the UK when it comes to services, mainly financial in nature.
If the UK and EU manage to reach an amicable separation agreement by giving, for instance, the UK a similar status to that of Switzerland and Norway, allowing it free trade access, there is a possibility of mitigating the economic effects of the Brexit. However, if the EU applies punitive Customs duties on goods, services and investments from the UK, as well as erects non-tariff barriers and restricts London’s ability to conduct Euro dominated financial transitions, the disruption would be severe with the possibility of igniting a prolonged recession.
Apart from Europe, Britain’s decision to quit Europe has also raised the prospects of sustained apprehension in the rest of the global economy as countries struggle to surmise the possible impacts of the exit.
The US economy is one of the candidates to feel the consequences of the exit. The ripple effects will affect US exports, investments, employment prospects both in England and back home. American investment in the UK is now reaching a whopping 600 billion dollars. The US also uses Britain as a gateway to access European markets for its exports, reaching around 60 billion dollars. If the UK goes into recession as a result of its divorce from Europe, it will no doubt jeopardise America’s access to the EU market. It will also have its own ramifications on American banks operating in Europe.
Again, if the British pound continues its plunge and sparks a Euro-wide crisis, it is likely to cause the dollar to be too strong, thereby reducing America’s competitiveness.
Moreover, a weak pound and Euro could force the US Federal Reserve to put on hold its interest rate hike, which could affect productivity and trigger the accumulation of debt.
While the UKs exit from the EU would most certainly cause turmoil in Europe, the effects of Brexit on Asian economies, including China, is somehow limited to Hong Kong, Vietnam and Cambodia. These are countries with strong ties with the UK; they may likely feel a noticeable hit.
For China, the second largest economy in the world after the US and currently slowing down significantly, the exit cannot be good news. China’s bilateral trade with the UK has now reached 80 billion dollars and the Brexit could have an outsized impact on its future export performance. Even more worrying, should the exit fatally damage London as a premier global financial centre, the value of China’s investment will be impaired. China has to find an alternative before it is too late.
Other emerging economies too will also be affected by the UK’s exit. Brazil, which was once the darling among emerging countries, is the list of countries to suffer the most. The Brexit will complicate its efforts to stop its economic breakdown, due to a full blown political storm it is currently going through.
The economic and financial repercussions of the Brexit will have a knock-on effect on African economies. The UK is a financial hub in Europe; thus, countries such as South Africa, Nigeria and Kenya, whose economies are well integrated with the UK, will feel the impact on their financial markets, particularly if the UK’s economy goes into recession. South Africa’s battered economy has already started to feel the Brexit impact as its currency, the rand, is on a downward spiral. A number of South African countries, which have firms listed in the London Stock Exchange, have lost a hefty amount of their stock values as a result of the current turmoil.
For countries like Kenya with the twin fiscal and current account deficit, the Brexit means external financing of the deficit is likely to get more expensive. The weaker Kenyan Shilling will make imports more expensive and one of Kenya’s top exports, cut flowers, could suffer from a declining pound Sterling as Britain’s appetite for imports is expected to be low.
Britain exit from the EU could not have come at worse time for Nigeria, Africa’s largest economy. At a time when it is struggling to fix its economy, the immediate effect of the Brexit will have serious ramifications for Nigerial, which is already on the brink of a recession.
The UK is Nigeria’s largest source of foreign direct investments; it is also an important export destination. A slowing British economy and its reverberating effects could signal a drop in investments, trade and remittances.
An increase in the price of bonds is another outcome of the UK’s decision to leave the EU, making it difficult for a number of African countries, including Ethiopia, to access the Eurobond market for investment funding. Any continuation of the market volatility will have significant implications on past and future foreign bond borrowings.
Following the leave votes, African Eurobonds already plunged. Nigeria’s dollar bond due in 2023 has seen its yield rate raised to 7.3pc, according to Bloomberg data. Ethiopia’s 2024 Eurobond yields climbed up by 10 basis points to reach 7.98pc, the highest since June 14, 2016. Yields on Rwanda’s dollar debt due into 2023 have spiked to 7.59pc.
The biggest impact of the decision by the majority of the British public on Africa will come due to the end of British largesse, its concerns with and responsiveness to global development issues. The UK has been a staunch opponent of the European Common Agricultural Policy (CAP) designed to favour European farmers and hinder African farmers’ competitiveness in the export market. With more than 60pc of Africa’s economically active population working in agriculture, the subsidies play an important role in the livelihoods of a majority of Africans.
Now with the British departure, there will not a be strong voice within the bloc advocating for African farmers.
Britain is the largest contributor of development aid to Africa with a commitment to spend 0.7pc of its Gross National Income (GNI) on development aid. If the UK economy goes into recession, the flow of aid to Africa will diminish substantially affecting countries such as Ethiopia and Sierra Leone. Trade relations between the EU and Africa are governed by the Cotonou Agreement of 2000 as well as a series of regional deals under the economic partnership agreements.
The UK’s eventual departure from the EU will fundamentally change the partnership agreement between the trading blocs such as COMESA, EAC and ECOWAS. It is also an inopportune moment for many African countries currently facing external shocks due to falls in commodity prices and high costs on external borrowing. There is not much they can do except to adjust their domestic economic policies to the new reality.
Assuming the worst case scenario, Brexit will leave behind a legacy of disruptive impact, particularly in short-term uncertainty. The long-term impact will not be felt any time soon.
