By Dan Steinbock
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