*Brexit impact on Africa will be mixed/ EIU 05.07.16* The British public's decision on June 23rd to exit the EU will have a varied impact on Africa in the short to medium term. The UK is a significant trading partner for many African countries, but there will be limited potential to improve trade deals in the medium term. UK tourism to Kenya is expected to decline still further as consumers in the UK rein in spending, confronted by uncertainty and a weaker pound. South Africa is most exposed, having already faced extreme volatility in the rand in the wake of the "Brexit" vote. Ramifications for overseas development assistance (ODA) from the UK to Africa are unclear. In most cases, however, Brexit will exacerbate existing woes rather than creating any new effects.
An even weaker oil price The impact of Brexit on Africa is likely to be mixed and will make itself felt through three key components: trade in goods and services, exchange-rate volatility and weakness, and foreign-currency flows, including remittances and ODA. We have now reduced our oil price forecast from an average of US$42.7/barrel to just US$40.3/b in 2016, rising to US$52.5/b in 2017. Oil makes up nearly half of Africa's exports, but represents over 90% of the exports of the region's three largest oil producers, Nigeria (91%), Algeria (95%) and Angola (96%). The weak oil price has already produced an economic crisis in Nigeria and Angola, and some international airlines have recently closed routes to Lagos and Luanda, citing the lack of trade and foreign-exchange restrictions as the primary reasons. Brexit's impact on the oil price exacerbates an already existing problem. However, a lower oil price for longer should benefit Africa's many oil importers, although the positive impact is likely to be mitigated by a stronger dollar. Limited impact on trade Hopes that Brexit could entail more favourable trade deals with Britain in the future, particularly for agricultural products, should be dampened by the reality that it will take years to renegotiate treaties. Although Africa's exports of food and beverages make up only 12% of the continent's total exports, a significant portion (17.7%) of those exports go to the UK, suggesting that, in the medium to long term, there may be some scope for improving deals. The overall effect would be limited, however, because Europe's importance to Africa as a trading partner has increased over the past five years, while that of the UK has moderated. In 2011 African exports to Europe represented 35% of the region's total, but had grown to 40% by 2015. An even stronger trend has emerged for African imports, where 45% of the total were sourced from Europe last year, compared with 31% in 2011. Over the same period, the UK's relative significance as an African trading partner moderated. Only 10% of African exports to Europe were destined for the UK in 2015, compared with 12% in 2011. The trend for imports is similar. UK will have to renegotiate the EPA-SADC deal Nevertheless, over the coming years, the UK will have to renegotiate its trade deals made under the auspices of the European bloc. This means that the UK's involvement in the Economic Partnership Agreement (EPA) between the EU and six countries from the Southern African Development Community (SADC), namely Botswana, Lesotho, Mozambique, Namibia, South Africa and Swaziland, will be nullified. The EPA is the culmination of 12 years of slow-moving negotiations and is now on the verge of coming into force; it was signed on June 10th but has yet to be ratified. Reaching a consensus between the six SADC states has been difficult, and the terms of the arrangement have arguably never been on a solid footing. As the UK is one of the bloc's biggest export partners in the EU, Brexit will complicate the already complex deal and probably alter what it means for its African signatories. The EPA has been hailed by both EU spokespeople and the participating SADC governments as a unique opportunity to boost intercontinental trade and stimulate local economic growth. The terms of the deal will allow SADC-EPA exporters completely free access to European markets and, in return, restrictions will be lifted on goods and services imports from the EU that do not directly challenge local industries. Yet from the point when the UK formally withdraws from the EU—if the UK triggers Article 50 of the EU treaties, this could be as early as late 2018—it will no longer be party to the agreement. For some SADC countries in the agreement, the UK is a major export destination. For Swaziland, Namibia, Botswana and Lesotho, the UK accounts for around 90% of their combined total shipments to the EU. For South Africa the proportion is lower but is still a significant 21%. Hence taking the UK out of the picture would drastically reduce several SADC states' export opportunities under the EPA. As the UK will remain party to the current agreement until it formally secedes from the EU, this will not be a pressing problem in the near term. (Indeed, the more immediate threat to SADC-EPA exporters will come from a weakening pound as part of the referendum's fallout, which will probably dampen external demand there.) However, unless a new trade deal with the UK can be struck beyond Brexit, there is a risk that the export benefits will become more muted for the EPA's SADC signatories. Regional tourism will be hit Weaker economic growth and heightened uncertainty are expected to dampen UK consumer spending generally, with a marked effect on discretionary spending on items such as tourism. With sterling forecast to decline heavily against the dollar, averaging US$1.32:£1 in 2016 (previously US$1.44:£1), and weakening further in 2017 to US$1.24:£1, it is likely that Africa's tourism revenue—particularly from Britain—will decline. In Kenya, the number of tourists from Britain has been falling for years. Tourism is Kenya's second-largest export earner after agriculture and contributed 9.9% to GDP in 2015, a share that has fallen from 13.2% in 2006, owing initially to the 2008 election violence, and subsequently to heightened security alerts linked to terrorist activity by Somalia's al‑Shabaab Islamists. Although tourism numbers were up by 14% year on year in first-quarter 2016, there were 15% fewer British tourists—who comprise 37% of the total. As British consumers tighten their belts, the numbers can be expected to fall further in 2017. South African rand will come under pressure Exchange rates in Sub-Saharan Africa's largest economies are already under pressure. In Nigeria and Angola, this is a direct consequence of the depressed oil price. The South African rand, which saw its value against the dollar halve between December 2011 and December 2015, has already been hammered by domestic problems and large-scale flows out of tradable emerging-market currencies. On June 24th the rand fell by more than 8% against the dollar in intra-day trading, a larger swing than the 5% drop seen during the global financial crisis. In the short to medium term, the flight to safe-haven assets can be expected to add further downward pressure on the rand, exacerbated by higher volatility in financial markets. Key economic indicators—already weak—can be expected to worsen, with currency weakness translating into higher inflation through secondary effects and monetary policy neutralised. For South Africa, this could have significant political repercussions, particularly with local government elections scheduled for August 3rd. Consumer and business confidence has been under strain for several quarters, and the economic impact of Brexit on South Africa could prove a tipping point. Mixed impact on West and Central African countries None of the countries in the Union économique et monétaire ouest-africaine (UEMOA) and the Communauté économique et monétaire de l'Afrique centrale (CEMAC) currency unions have particularly close political or economic relations with the UK. However, the prospect of rising global economic uncertainty will be transmitted to UEMOA and CEMAC countries via weaker investor sentiment, exchange rates and commodity prices. The euro is now expected to weaken against the US dollar—as investors look for safer assets in markets isolated from the European troubles—and with both UEMOA and CEMAC having currencies pegged to the euro, their francs will follow. This will make dollar-priced imports more expensive and boost inflationary pressures, although inflation is currently low in most UEMOA and CEMAC countries. Weaker currencies could in theory boost exports and tourism inflows, although the impact is likely to be limited, as non-commodity exports are small, most countries in the region are dependent on trade with Europe and the tourism sectors are underdeveloped. Prolonged euro zone turbulence or other member states opting to vote to leave the EU could reignite the debate about the merits of maintaining the currency peg. With crude oil being the dominant export commodity in most CEMAC countries, this will affect their balance of payments and fiscal positions. For oil-importing UEMOA countries, lower oil prices will offset part of the inflationary impact caused by a weaker currency. The price of gold, a safe-haven asset, will rise on the back of greater global economic uncertainty, giving a boost for gold producers such as Mali and Burkina Faso. Remittances share of GDP will fall Nigeria, Somalia, Kenya and Ghana are among the top ten recipients of remittances from the UK. Globally, Nigeria received US$20.8bn in remittances from abroad in 2014, of which US$3.7bn (18%) came from the UK. Remittances from abroad provide badly needed income, particularly for poorer households in developing countries, and represent a significant share of GDP in some African countries. For example, in Liberia, remittances make up nearly 25% of GDP, in The Gambia 20% and in Senegal 10%. Brexit can be expected to affect these flows through a decreased ability to remit as senders in the UK confront tougher economic times, and they will be worth less in the receiving country owing to pound weakness. Aid and development assistance A generous donor, the UK is the source of 7% of all bilateral aid (net ODA) to Africa, with ODA from the UK to Africa reaching nearly US$4bn in 2014. Of this, the lion's share (92%) goes to Sub-Saharan Africa, the top five recipients being Ethiopia, Nigeria, the Democratic Republic of Congo, Tanzania and South Sudan, who collectively received 45% of the UK's total aid to Sub-Saharan states between 2010 and 2014. The proportion of aid that comes from the UK varies. Although not a Sub-Saharan state, Saint Helena, an extreme case, received 97% of its aid from the UK between 2010 and 2014. Over the same period, 28% of Sierra Leone's ODA and 18% of Zimbabwe's came from the UK. Nigeria, Somalia and South Sudan are also relatively dependent on the UK as a donor. The impact of Brexit on aid flows is uncertain. In the short term, there is unlikely to be any great change, other than a potential exchange-rate impact depending on the currency-base used in contracts. Over the longer term, the impact will depend on the extent to which Brexit results in a more insular attitude within the UK itself. -- To post to this group, send email to [email protected] To unsubscribe from this group, send email to [email protected] Visit this group at https://groups.google.com/d/forum/southsudankob View this message at https://groups.google.com/d/msg/southsudankob/topic-id/message-id For more options, visit https://groups.google.com/d/optout --- You received this message because you are subscribed to the Google Groups "South Sudan Info - The Kob" group. To unsubscribe from this group and stop receiving emails from it, send an email to [email protected]. 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