On the 23rd of June 2016, the United Kingdom (UK) voted in favour of leaving the European Union (EU). Proponents argued that the EU diminished the sovereign role of the UK and its influence. Voters against the exit argued that being part of a large regional community creates a stronger global influence and security. Shortly after the vote, David Cameron resigned as British Prime Minister with effect October. This was followed by a decrease in the value of the pound to levels last seen in 1985 and Asian stock markets decreases. The vote may indicate a view that the political system has not delivered inclusive economic growth expected from a globalized economy. The Lisbon Treaty (Article 50) now applies and the European Treaties cease to apply from the date of entry into force of the withdrawal agreement, or failing that, two years after notification of withdrawal to the European Council. Since the UK retained its currency, the exit is at least a bit easier. The UK will no longer benefit from various free trade agreements negotiated by the EU, including the recently signed Southern African Development Community-EU Economic Partnership Agreement. It is also conceivable that Brexit may lead to a UK disintegration. The UK’s exit may eventually also harm the EU if other member states decide to leave. Various member states have expressed dissatisfaction with the EU rules and regulations. Opposition parties in EU countries such as France, Germany, and Holland may now push to exit, which could change the global political landscape.
The exit increases global uncertainty and a potential capital and currency flight to safer economies, away from emerging markets. Brexit would most likely impact the UK’s financial services industry, which employs more than two million people and pays tax of USD89 billion (2015). London’s status as a financial capital may, as a result, be eroded especially if it loses the rights that banks can reside in the UK and sell their services throughout the EU. Companies such as JPMorgan Chase & Co and HSBC Holdings have already indicated that they may relocate jobs from London. Brexit could impact Africa in a number of ways, such as its impact on the global economy, reduced British involvement with global development issues, and potentially decreased bilateral development assistance and trade.The exit increases global uncertainty and a potential capital and currency flight to safer economies, away from emerging markets. Brexit would most likely impact the UK’s financial services industry, which employs more than two million people and pays tax of USD89 billion (2015). London’s status as a financial capital may, as a result, be eroded especially if it loses the rights that banks can reside in the UK and sell their services throughout the EU. Companies such as JPMorgan Chase & Co and HSBC Holdings have already indicated that they may relocate jobs from London. Brexit could impact Africa in a number of ways, such as its impact on the global economy, reduced British involvement with global development issues, and potentially decreased bilateral development assistance and trade.
Brexit does not bode well for SA consumers with high levels of debt and the poor who spend most of their income on food. South Africans with debt such as vehicle finance, home loans, and debt linked to the prime interest rate, could expect to see increased debt levels. The UK is the largest single investor in the SA economy and, as a result, Brexit could have a direct impact on the working class in the form of rising prices and possibly even job losses. The prices of imported goods such as crude oil and maize meal would likely increase significantly. Increases in fuel and diesel prices are expected in July. As South African consumables are mostly transported by road this would also impact prices. SA’s GDP growth in 2016 is projected to be around 0.3% and predictions have it that Brexit may reduce SA’s growth rate by 0.1% and increase unemployment and inflation. This may put the South African Reserve Bank (SARB) under pressure to increase the prime lending rate.
Exports from SA to the EU exceed USD17.1 billion (21% of SA’s exports) (2015). Approximately 30% of SA imports are from the EU, and the EU-SA trade balance favours the EU. EU-SA trade amounts to 25% of SA’s trade. SA will also be impacted by the possible renegotiation of trade agreements between the UK and her EU counterparts. The Rand weakened significantly against the dollar shortly after the Brexit announcement. This linked with potential rating agency downgrades, could have a severe impact on the economy. The UK is SA’s biggest single investor. The UK exit will require SA to renegotiate its trade relations with the UK, which accounts for 3.7% of SA’s total trade. This may impact foreign direct investment into SA in the short term and could negatively impact trade between UK-based companies and SA. Should capital outflows from emerging markets follow, this would place the rand under further pressure. With SA’s current account deficit of approximately 5% of GDP it is very dependent on capital inflows. SA is the UK’s biggest African trading partner and the UK is SA’s seventh largest import and export market in global terms (2014). SA-UK trade favours SA. SA exports 20% of all of its goods destined for Europe, to the UK (2015). The UK represents 45.6% of direct investment into SA and 10.9% of SA’s global direct investments. In December 2014, the UK’s total direct investments in SA amounted to approximately R730 billion (60% of total EU direct investment into SA). In excess of 30% of SA’s direct investment (R185 billion) in the EU were in the UK. In 2014, the UK’s portfolio investments in SA exceeded R780 billion (more than 57% of EU’s total), and SA’s portfolio investments in the EU equaled R1.28 trillion (more than 60% in the UK).
Finance Minister Gordhan is confident that SA can conquer this storm as it would take two years of negotiations between the UK and the EU to conclude the break, and trade links between SA, the EU, and the UK are fairly strong, and based on solid agreements. In addition, National Treasury and SARB are monitoring developments and implications for necessary corrective measures. Gordhan is also of the view that the SA financial systems are extremely resilient and reliable.
Read more BDO Insights Articles