The shock decision by the U.K. to exit the European Union after more than four decades has roiled global markets and set the stage for years of extrication talks. The fallout is likely to be especially severe in Africa because the 28-nation trading bloc is by far the continent’s biggest source of trade and foreign investment. Here are some of the likely consequences:
What happens to trade accords Africa has agreed with the EU?
Officials have spent more than a decade negotiating Economic Partnership Agreements that would regulate the terms of much of the trade between the EU and Africa. The EPAs, which give African nations enhanced market access, and other trade accords are likely to have to be reworked, while separate talks may have to be held with the U.K. on market access, according to Willemien Viljoen, a researcher at the Trade Law Centre in Stellenbosch, northeast of Cape Town.
“This is a legal, economic and constitutional nightmare for all those who have trade agreements with the EU,” said Raymond Parsons, a professor at the North West University Business School in Potchefstroom, about 120 kilometers (75 miles) west of Johannesburg. “No one has left the EU before. We are into uncharted waters here.”
What effect is Brexit likely to have on trade flows?
While the U.K. has two years to negotiate its exit from the EU, the impact on African exporters may be more immediate if an anticipated slowdown in the U.K. economy materializes. Suppliers of agricultural and manufactured goods are among the most vulnerable.
A quarter of sub-Saharan Africa’s trade last year was with the EU, with two-way flows totaling $170.1 billion and the U.K. accounting for $20.7 billion, data compiled by Bloomberg shows.
Some industries see an upside to Brexit.
“The plant health regulations they have in the EU are very strict,” said Justin Chadwick, the chief executive officer of South Africa’s Citrus Growers Association. “The U.K. does not have any citrus at all. Their plant health regulations could be less onerous. And on tariffs, because they do not have a local industry to protect, they could negotiate differently to when they were part of the EPA.”
What does Brexit mean for Africa’s investment prospects?
Slowing growth, a drought in southern and eastern Africa and weak commodity prices had already dimmed the investment appeal of the world’s poorest continent and Brexit is set to make things even worse.
“If you were going to do a deal, hire people or buy new equipment you hold off on that,” said David Shapiro, director at Johannesburg-based Sasfin Securities. “It stalls economic growth as everybody just holds back trying to find out what the next move is.”
Africa attracted $71.3 billion of foreign direct investment last year, down from $88.5 billion the year before, according to accounting firm EY. Portfolio flows may also suffer, according to Bongo Adi, an economist at the Lagos Business School and Pan-African University. “People will want to move their assets away from where they see higher level of risk,” Adi said.
What can companies expect?
In addition to wild currency swings, jittery markets and political upheaval, businesses operating in both Africa and the U.K. should brace themselves for a bureaucratic nightmare.
Companies exposed to the UK may have to renegotiate contracts, contend with a raft of new regulations and face more burdensome visa requirements, according to Marelise van der Westhuizen, regulatory director at law firm Norton Rose Fulbright in Johannesburg.