posted on 08 July 2016
by Dan Steinbock, Difference Group
Whatever its final impact, in the short-term the UK's EU referendum will increase global economic uncertainty, market volatility and economic risk. In Africa, most scenarios will prove costly, particularly among those economies highly exposed to UK trade, investment, banking and remittances.
In the past weeks, I have been on a multi-country tour in Europe, including London right before the referendum. Despite media headlines about "shock," the Brexit outcome was not a surprise. It reflects years of UK's economic malaise following the global crisis, the European debt crisis, and the Britons' ambivalence about the EU, the euro and integration.
After the referendum, President Buhari expressed his hope that Nigeria could enjoy "greater cooperation and consolidation of shared interests" with the UK, "despite the outcome of the referendum." Naturally, that's the hope of most African leaders. However, as the referendum outcome will add to uncertainty global uncertainty, investment and confidence will be the first to suffer.
In the UK, Brexit economic implications will be mainly negative. In April, the UK Treasury estimated that, in the next 15 years, an exit could cause an almost 10% loss of GDP, substantial plunge of household wealth, falling exports, rising prices and possible recession. While other reports have followed in the footprints, final estimates depend on London's choices in the coming months.
The Brexit process is not a spurt, but a marathon.
Global Brexit impact
In light of the likely spillover channels (trade, investment and financial linkages), Ireland, Luxembourg, the Netherlands - the region's open, free-trade economies - could be most exposed to the UK spillovers in Europe. In contrast, Russia and Eastern Europe, along with France would be less affected by adverse spillovers.
Economically, the U.S. will be significantly more vulnerable to financial-market volatility than a trade breakdown. From the U.S. perspective, an adverse scenario could mean credit tightening, impaired trade finance, and reduced lending by European banks.
Unlike the US, China is significantly less exposed to the Brexit. China's new trading Silk Road initiatives enter Europe through Southern and Eastern Europe, not the UK. And as Beijing has only begun critical financial reforms, it is not vulnerable to British portfolio flows or bank claims in the way that the US is.
Nevertheless, China is indirectly exposed. In relative terms, Hong Kong - as China's Special Administrative Region - may be most exposed to the Brexit worldwide, along with Singapore. The Brexit exposure accounts for rising odds of a contraction in both city-states. As financial hubs, the two are highly exposed to UK's financial flows and banks.
Hong Kong may have greater risks than Singapore, thanks to stronger Hong Kong dollar, which is rising with the US dollar as investors are scrambling for safe havens amid a challenging global environment.
In the short term, much depends on whether Brussels can contain the economic uncertainty, market volatility and political risk. In the UK, the referendum has energized the pro-EU Scotland, which might try to stop the Brexit and, if that fails, could also seek 'Scotexit' - that is, a divorce from the UK.
In Western Europe, the Brexit is likely to support Euro-skeptics in countries that have an unfavorable view of the EU, including Greece, where living standards have plunged; France, where President Hollande's pro-EU socialist government is under fire from both left and right and the National Front's Marine Le Pen is currently the most likely President in 2017; and Spain where the leftist Podemos and anti-system movement have grown into a major political force.
Moreover, several EU economies - including Italy, France, Sweden and Belgium, Netherlands - have already expressed willingness to hold a UK-style EU referendum. If anti-EU forces will win in these countries in the coming months, future history will record the UK referendum as the beginning of the end for the EU.
Internationally, the Brexit is likely to inspire and amplify moderate, opportunistic and extremist separatist efforts. Few countries are entirely immune to such aspirations. Even Nigeria is no exception, as exemplified by Niger Delta Avenger (NDA), the militants in the oil-producing hub of Niger Delta. In this scenario, a series of attacks on oil pipelines since February could pave way to something far more challenging.
A few years ago, President Jonathan ignored Boko Haram's initial gains, which resulted in a major security risk. As Nigeria's oil production has been cut by some 600,000 barrels per day in the course of the year, President Buhari cannot ignore the economic, political and security threat of Niger Delta's militants on oil infrastructure and Nigerian sovereignty.
In Africa, South Africa, a former British colony, remains most vulnerable to the Brexit. If the rand had already lost 21 percent against the US dollar this year at the eve of the UK referendum, it plunged another 8 percent against the US dollar after the vote. If the UK were to suffer a post-Brexit recession, it would reduce trade and investment between South Africa and the UK - the former's fourth-largest trading partner.
If a UK contraction would cause a fall in British consumer demand; other African exporters would take a hit as well. Moreover, if the UK will eventually exit the EU, all UK-African deals - according to some analysts, some 100 trade agreements - would have to be renegotiated since they are currently the EU's trade deals with Africa.
In late May, Kenya's Central Bank Governor Patrick Njoroge warned about the Brexit risks to the global economy and markets. Certainly, from Africa's perspective, a post-Brexit UK would be less inclined to be interested in global development. After all, London's central role in development initiatives peaked during the UK presidency of the G8 Summit in 2005 when Western leaders agreed to double aid to Africa and eliminate outstanding debts of the poorest countries. Today, the UK remains a critical contributor in the European Development Fund, giving $585 million (or 15% of the total).
In contrast, the Brexiteers argue that development aid would be more effective when the UK is not part of the EU. In a post-Brexit UK, immigration controls would be more stringent than within the EU, while some argue it could actually foster trade relations with African economies if the UK would ease immigration controls for Commonwealth citizens. Nevertheless, these arguments have not been substantiated with persuasive evidence.
Nigeria's naira dipped by 31 percent on June 20, the first day of trading following a currency float; just days before the Brexit referendum. Previously officially pegged around 197-199 per dollar, naira sold at less than 290. After one week with the new foreign exchange regime in place and amid the Brexit volatility, Naira firmed to 282.
Though a former British colony, Nigeria is not among the most exposed economies to the Brexit waves. Nevertheless, it would have a negative impact on bilateral trade between Nigeria and the UK, which currently amounts to £6 billion and has been projected to climb to £20 billion by 2020. As the UK is Nigeria's largest source of foreign investment, the Brexit would also endanger all investment flows.
In the short-term, some effects might be counter-intuitive. For instance, the drastic plunge of the UK pound and its central role in the Commonwealth could improve Nigeria's terms of trade with the UK and some other economies. In the long-term, challenging scenarios could not be avoided, however. While an eventual Brexit would have a series of direct and indirect effects on Nigeria, the ensuing uncertainty in the UK - and the dissolution threat in the EU - could have severe repercussions. After all, the UK accounts less than 5 percent of Nigeria's global trade, whereas the share of the EU amounts to close to 40 percent.
Typically, most estimates of the Brexit impact focus on trade, investment and banking, which are typical to advanced economies, but ignore the migration channel (read: remittances), which are vital to emerging and developing economies. In 2015, Diaspora Nigerians sent back home some $21 billion, which makes the country the sixth largest remittances recipient worldwide. As long as more than 1 million Nigerians live in the UK, an eventual Brexit, as well as associated uncertainties, will be reflected in their remittances.
Indirectly, the contagion venues will be equally hard to avoid. Take, for instance, the trade channel. More than half of Nigeria's exports go to India, Brazil, Netherlands, Spain, South Africa and France. Of these countries, South Africa, Netherlands, Spain and France are relatively highly exposed to the Brexit. While India and Brazil are more insulated from the Brexit, reform momentum has slowed in the former and the latter is amid its worst economic crisis in a century.
What's next in the British 'House of Cards'
Unlike Germany, Brussels is urging London to exit soon, but that requires the UK government to trigger the Article 50 of the EU Treaty, which would start a formal withdrawal process. When UK Prime Minister David Cameron resigned, he indicated that a new PM must oversee the Article 50 process. That unleashed floods of largely misguided speculation. As The Economist forecast that Boris Johnson, a volatile Brexiteer leader, would become Cameron's successor, Johnson himself announced that he would not run for prime minister.
The former mayor of London changed his mind after a betrayal by Michael Gove, the justice secretary who was to be his campaign manager. In turn, Gove declared his willingness to lead Britain - after repeated denials of having such aspirations to higher office.
To add to uncertainty, the UK suffers from a unique democracy deficit. The UK referendum demonstrated that most Britons (52%) are currently for a Brexit, and yet most members of the UK parliament (about 70%) favor pro-EU views. So the question is, will the UK follow the views of its citizens or its MPs.
As I predicted prior to the referendum, the UK referendum will foster substantial economic uncertainty, market volatility and political risk. In turn, these could still lead London and Brussels back to a negotiating deal; a still another referendum; a different deal; or an eventual Brexit. Despite the referendum outcome, all options are still viable - although uncertainty, volatility and risk will remain elevated.
If the - actual or potential - Brexit will not undermine the EU, further integration is likely to occur in a more rigid and protectionist bloc dominated by the policies of Europe's core economies, particularly Germany and to a lesser degree France. In the medium-term, much depends on how London will rebuild its global engagement. It could retain its membership of the European Economic Area (EEA), like Norway. Or it could opt for a negotiated bilateral agreement, such as that between the EU and Switzerland, Turkey and Canada. Or it could choose World Trade Organization (WTO) membership without specific agreement with the EU, like Russia or Brazil.
Following the recent EU Summit, the UK parliament must also rule on the new petition that considers the referendum outcome non-binding. As Slovakia took charge of the EU presidency on July 1, it must deal with the Brexit issue. For now, the defining moment must ensue by the UK Conservative Party conference in early October when a new prime minister should trigger the Article 50 process - which, in turn, would result in months of divorce talks.
Whether the trigger will be deployed in a quarter of a year, or sooner - or not at all - the worst has already happened. Brussels can no longer wish away the Brexit uncertainty, volatility and risk - which will have mainly negative effects in Africa.
Note: The original commentary was published by BusinessDay Nigeria on 04 July 2016.
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