29th June, 2016
EXX Africa in its report analysed the impact of an eventual Britain’s exit (Brexit) from the EU on three of UK’s most important African markets namely Nigeria, South Africa and Kenya.
It explained that the Brexit also threatened over 1.4 billion-dollar UK investment in Nigeria and the UK-Nigerian 21-billion-dollar annual remittance.
The report stated that there was extensive trade and security cooperation between the UK and Nigeria likely to face several years of disruption as the UK leaves the EU.
It noted that “Nigeria is UK’s second largest export market in Africa.
“Bilateral trade between the two countries is currently worth 8.3 billion dollars and projected to reach 25 billion dollars by 2020.
“The UK is also Nigeria’s largest source of foreign investment, with assets worth over 1.4 billion dollars. Moreover, UK-Nigeria remittances account for 21 billion dollars a year.
“The UK is also one of the largest development assistance donors to Nigeria, although Nigeria is not as aid-dependent as most continental counterparts.’’
It stressed that UK’s economy was experiencing slow down on the back of a departure from the EU.
It noted that the economic potential disruption as the UK renegotiate its trade agreements would likely reduce trade flows, foreign direct investment and Nigerian remittances.
It pointed out that on June 24, Nigerian stocks ended a three-day rally, falling 1.4 per cent over worries of Britain’s vote to leave the EU.
“Nigerian banks, such as Fidelity Bank and Zenith Bank, recorded the biggest losses. Nigerian stocks had previously rallied 8.5 per cent after the government floated the naira and ended a highly controversial currency peg.
“As a result, new portfolio inflows will slow, which will hamper the implementation of the country’s new foreign exchange mechanism.
“On June 20, Central Bank of Nigeria (CBN) introduced a more flexible foreign currency policy, removing a de facto peg of around 197 naira to the U.S. dollar.
“The naira’s 16-month peg to the dollar had overvalued the Nigerian currency, resulted in an economic contraction, and harmed investments.’’
It stated that the implementation of the fuel sector liberalisation, including the termination of a burdensome state-subsidy scheme, would likely face implementation issues.
The report noted that the sector’s liberalisation would add to fuel importers’ margins and allow shipments of fuel to resume.
It pointed out that the effective implementation of a new foreign exchange mechanism and liberalisation of the fuel sector in Nigeria would face fresh hurdles as the UK withdraws from the EU.
According to the analysis, Nigeria will also struggle to attract interest in new debt sales aimed at financing its expansive budget.
The report stated that the main impact of “Brexit’’ on Nigeria would bring further deterioration on the country’s already struggling economy.
It explained that Nigeria’s economy was being affected by the fall in global oil prices and a steep drop in local crude production due to insurgency in the Niger Delta.
It stated that Finance Minister Kemi Adeosun was due to launch a planned eurobond sale later in the year.
It added that “the government plans to raise 10 billion dollars of new debt of which 5 billion dollars would come from foreign investors.
“Much of this planning would be delayed as risk averse investors steer away from Nigerian debt.’’
According to the report, UK is also a key partner in Nigeria’s security issues.
It stated that the UK had been crucial to drawing international attention to the Boko Haram insurgency in Nigeria’s northeast.
“There is a risk that the UK would become distracted from international security threats, such as those by Boko Haram, as it negotiates its departure from the EU,”
it explained.
It noted that Brexit would also impact negatively on South Africa as its economy was more likely to fall back into recession.
It stated that South Africa’s extreme currency volatility showed a downgrade of its credit rating to non-investment grade in December was now almost inevitable.
According to the report, that country’s bi-lateral security cooperation and aid programmes is facing less disruption.
The South African economy is the most exposed to the global economy and in particular its currency is the most volatile among its emerging market peers, it added.
Stressing that South Africa relied on foreign capital to finance its wide current account deficit, it noted that additional fears of euro-scepticism in other EU countries also stoked fears that South Africa’s trade with the EU was under threat.
South African exports to the EU reached over 14.2 billion dollars in 2015 but the impact on that economy would be short-lived and relatively manageable.
In a worst case scenario, where the UK economy was to shrink by 5 per cent and UK imports were to drop by 10 per cent, South Africa’s economic growth would fall by only 0.1 per cent, according to research by North West University.
It noted that although Kenyan markets were relatively stable following the Brexit vote, any disruption in EU trade negotiations would negatively impact the cut flowers export market.
According to the report, it is likely that the UK will prioritise trade negotiations with Kenya, which can even benefit Kenya and other EAC members.
Kenyan officials were quick to respond to the market turmoil which followed UK’s vote to leave the EU.
The country’s Finance Minister, Henry Rotich, assured investors that Kenya had adequate foreign exchange reserves to absorb any shocks from the crisis.
Kenya has 5.6 billion dollars in foreign reserves, which amounts to 5 months of import cover, which is higher than the four months the country usually holds.
Its central bank said it would be ready to intervene in money and foreign exchange markets if required.
Such assurances steadied the impact on the Kenyan shilling, but some banking stocks still suffered losses.
Equity Bank and Co-operative Bank were down over 2 per cent on June 24, while other stocks were unchanged.
It stated that UK’s interest in Kenya may not all be affected because of the large presence of British expatriates and tourists.
“The UK is likely to maintain security co-operation toward mitigating the threat posed by militant group al-Shabaab, which has British nationals active within its ranks,” it stated.
The EXX AFRICA is a specialist intelligence company that delivers accurate, decision-ready and commercially relevant forecasts on African political and economic risk to businesses.