How does Brexit affect business in Africa?
The world continues to weigh in on the impacts of Britain’s exit from the European Union especially with a tone of epitaph. Obviously, there will be consequences such as painful renegotiation of trade deals, security and movement. The EU has stated that Britain should not expect to negotiate for goodies without expecting to take on responsibilities as there will be no pampering whatsoever. The Pounds declined to a new 31-year low against the dollar at the announcement of the referendum result on 23rd, June 2016. The 10 year government bond yield – the Gilts – also took a pounding to historic lows. The perception list of keen observers of the Brexit continues to rise at an alarming rate with anti-migrant and racist incidents increasingly becoming a threat to safety.
The decision to leave the EU which was largely influenced by the lower class and unskilled segment of the population raises questions about unity and freedom in Britain. Unlike the Greek bailout of 2015 which would have impacted credibility of the EU, Brexit was based on ideals that showed lack of commitment to Europe’s vision. Although there has been growing concerns about the leadership of the EU, Brexit was fuelled by fear of the unknown wrapped in refugee crisis and unproductive migrants.
Africa has long enjoyed close economic ties with the UK – South Africa being Britain’s largest trade partner – including diplomatic engagements and intergovernmental cooperation. The UK pledged to improve trade deals between African countries and make it easier for businesses to sell their goods – by helping to reduce red tape and improve infrastructure. In 2013, the UK’s Department for International Development first published efforts to achieve trade improvements in Africa with the intention to invest £57.4 million to improve trading in Uganda and Kenya and modernise East Africa’s largest port in Mombasa. This is expected to help boost exports in Uganda by £200 million and in Kenya by £530 million by 2016.
Africa will enjoy more trade assistances which will help to create jobs, grow economies and increase freedom to trade. The opportunities are endless for Africa as a continent. This will in turn help to create vibrant new markets for British businesses to invest in. In the long run, African countries will experience improvements in balance of trade as more products can be export worthy to earn foreign monies. However, cost of borrowing from UK is expected to rise.
Brexit will also dampen investor’s appetite for Eurobonds for exposed African countries like Nigeria which is also grappling with significant local issues. Nigeria’s intended borrowing of up to $5 billion to plug a N2.2 trillion deficit in the 2016 budget may attract a higher bond yield payment. The risk elements introduced by the Brexit will also affect further Eurobond issuance.
Earlier, large capital markets in Africa reacted to the Brexit news with a two-three days trading decline – South Africa hit a new 5 year low on 27th, June 2016 in a single trading day. This added volatility is not expected to persist in the equities market but will continue to dictate the level of fixed income activities. The Brexit holds both sides of the coin for businesses in Africa.
By – Korede Ologun
Korede Ologun is Research & Strategy Analyst at GTI Securities Limited, Nigeria.
