How Brexit may affect Nigeria and other African states

On March 25, 2017, European leaders will mark the sixtieth anniversary of the signing of the Treaty of Rome, the European Union’s founding document; Britain will not be joining others for this; yesterday it voted to leave.

Those in support of Brexit argue that Britain loses a lot by staying in the EU; having to pay millions of pounds every week as its contribution to the European budget. They also complain about the extremely bureaucratic nature of the European parliament, which they claim is hurting British exporters. Also, they argue that unmitigated migration from the European Union into Britain is creating an imbalance in the welfare schemes of the UK government. However, some experts have maintained that Britain actually gains much more from the EU than it pays as contributions, and despite the bureaucratic hurdles, British companies have unfettered access to the entire European Union.

There are political, economic and social implications associated with Brexit. Although only 51.9 percent of total voters in the referendum supported Brexit, the whole world will feel the impact of their choice.

Stocks take a hit

The  pound fell to the lowest level in more than 30 years and European banks slumped to their steepest losses on record as Britons vote to leave the European Union.

“It’s scary, and I’ve never seen anything like it,” Bloomberg quoted James Butterfill, 41, head of research and investments at ETF Securities in London to have said. “A lot of people were caught out, and many investors will lose a lot of money.”

European free market system under threat

For decades, several corporation have had access to the rest of Europe just by setting up factories at an EU member state; this unfettered access is threatened.

Brexit may “trigger agitations from far right parties in the eurozone to call for similar referenda,” Ikpenmosa Uhumuavbi, a corporate lawyer who is Senior Counsel at Brace Law Partners says.

“This could weaken the union and precipitate a breakup of the EU as a trading block.”

Even the UK may break up

Already, the decision of Britain to leave the EU has already started discussions about a second Scottish independence vote. Scotland’s first minister, Nicola Sturgeon said it was “democratically unacceptable” that Scotland faced the prospect of being taken out of the EU against its will. A majority of voters in Scotland and Northern Ireland voted to remain in the EU. Voters in England and Wales overwhelmingly voted to leave. Brexit may be the end of Britain.

“Although it is difficult to ascertain the extent of impact at this stage, there are clear political, economic and social implications,” Uhumuavbi said.

South Africa may take a hit

Raymond Parsons and Wilma Viviers, professors at the business school and trade research unit at the university in Potchefstroom, South Africa claim Brexit could shave about 0.1 percentage point off South Africa’s economic growth due to the nation’s strong trade ties with the U.K. and European Union.

“Slower economic growth as a result of potentially weaker trade and investment ties with traditional overseas markets means less job creation and yet higher unemployment,” they said.

Kenya is prepared

But Kenya is not worried. The East African economic powerhouse says it has enough foreign exchange reserves and funds from an IMF standby facility to weather any fallout of Britain’s exit from the EU.

“We think we are in a comfortable position,” Kenyan Central Bank Governor Patrick Njoroge told a news conference. However, he admitted that a British vote to leave the EU could hurt the global economy and Kenya would “feel the shock wave”. The apex bank disclosed that it had forex reserves enough to cover five months of import.

Nigeria needs to buckle up

Uhumuavbi says in view of recent happenings, “Nigeria has to recognise that the continuous erosion of FX reserves makes the economy more vulnerable to external shocks like the Brexit”.

“Nigeria should consider the impact of slow fiscal responses and lack of prompt policy alignment with the monetary authority.

“Internal uncertainties and external vulnerabilities are not good for a country currently suffering a widening current account deficit,” Uhumuavbi adds.

The corporate lawyer says the Nigerian government needs to carefully assess the present situation of things carefully and find a way to transform the challenges into opportunities by taking the right policy steps. “Nigeria has been very sluggish so far,” he laments.

He reminds the government that uncertainty in the global market means reduced spending and investment, which may significantly impact Nigeria’s economy. “Cost of borrowing in Nigeria may likely increase. Inflation certainly is on the rise even more,” he says.

Yvonne Mhango; Sub-Saharan Africa (SSA) Economist, Renaissance Capital thinks Nigeria will be the most affected via the financial channel.

Mark Bohlund, the Sub-Saharan Africa and Middle East Economist for Bloomberg Intelligence thinks there is so much ado about Brexit in Nigeria.

“Nigeria has a lot of problems of its own at the moment and the impact of Brexit will pale in comparison with how these play out,” he says.

“However, the decision to liberalise the exchange-rate system has opened up for financial inflows that might not materialise due to the turmoil caused by the Brexit vote.

“Trade negotiations will probably take some time to hammer out and frankly I don’t think trade with Nigeria will figure particularly high on the list of the UK’s priorities in these negotiations.

“In spite of aims to diversify the Nigerian economy, oil exports will remain central for the foreseeable future and decisions made in Saudi Arabia, China and the US will play a larger part in defining the oil price than the Brexit vote.”

What happens to Africa?

A note from Yvonne Mhango; Sub-Saharan Africa (SSA) Economist, Renaissance Capital on the potential effect of Brexit on Sub Sharan Africa sums this up.

Fall in demand for SSA exports, on the back of a slower UK economy  – There are fears that a Brexit could lead to a growth slowdown in Britain. A slower British economy will hurt the SSA countries that have strong trade linkages with it. And the reality is that only a couple of SSA countries have what one would call strong trade linkages with the UK, as most have turned East over the past two decades. The UK is an important export destination for the small island nations of Seychelles and Mauritius. The share of their exports that end up in the UK are in the double-digits. On a relative basis, Kenya is the third most exposed country in our SSA universe. However, in actual percentages, only 6% of its exports end up in the UK, according to IMF data. The rest of the East Africa Community is Kenya’s biggest export destination. That said, Europe is Kenya’s biggest source of tourists, and I think the British dominate that number. And tourism revenue, is still one of Kenya’s top three sources of FX. Less than 4% of Nigeria’s exports end up in the UK.

 Capital inflows may slow – investor confidence has been severely undermined by the uncertainty created by Britain’s vote to leave the EU. We think this may result in a slowdown in capital flowing into frontier markets, as investors hide in safe haven assets. Increased risk aversion may temper the appetite for SSA Eurobond issuances planned for 2H16. Nigeria, in particular was unfortunately hit yesterday by a double whammy – a credit rating downgrade by Fitch (to B+, from BB-), which will make it more expensive for Nigeria to borrow externally in 3Q15 when it issues its planned Eurobond, and Brexit, which may temper appetite for Nigerian assets. A further slowdown of capital inflows into SSA, will result in a further deterioration of external balances that are already reeling from depressed commodity prices.

 Currencies will come under pressure – the most tradable currencies will depreciate the most (like the ZAR has done), on the back of news that Britain voted to exit the EU. SSA  currencies, less so, because their currencies are more managed. Kenya’s central bank has pledged ‘to intervene in the money and FX market to ensure their smooth operation’. For Nigeria, we think this means investors that were encouraged by the liberalisation of the country’s FX regime and were considering dipping their toes into the country, may now pause given the rise in global risk aversion, following the Brexit vote. This further delays a recovery in Nigeria’s capital inflows, which is negative for the naira.

 Fed rate hikes may be pushed out – this would offer a reprieve for SSA currencies.

Trade agreements revisited – Britain may have to broker new trade agreements which may have some implications for SSA.

Now that it has voted not to remain, it would take a minimum of two years for the UK to leave the EU. During that time Britain would continue to abide by EU treaties and laws – however it would not take part in any decision making.