Now that the United Kingdom has voted to leave the European Union, African economies—already struggling from slowing demand from China and flat commodity prices—have now been thrown into confusion along with the rest of the world.
“Many emerging market and frontier asset markets will come under pressure,” Razia Khan, chief economist for Africa for Standard Chartered Bank, says . “Much will depend on how quickly some sort of financial market stability can be restored.”
The UK’s minister for Africa and advocate for leaving, James Duddridge, has promised that relations with the continent would only improve without the burden of the EU, but Africa’s largest economies are still likely to suffer.
South Africa’s rand and trade
South Africa’s already battered economy may be the worst affected by Britain’s exit. As it became clear that the UK vote had swung toward leaving, the rand plunged during early morning trading, becoming the worst performing currency after the British pound. As of mid-morning the rand had fallen more than 7%, its steepest single-day decline since the 2008 financial crisis.
Along with their peers on the London Stock Exchange, major South African companies dual-listed in London and Johannesburg are being hammered. South Africa’s close financial ties to the UK could be a problem—British banks’ claims on South African entities account for 178% of South Africa’s foreign currency reserves, according to analysts from UniCredit.
Economists also worry that trade between Africa’s most industrialized economy and the UK will suffer. (The UK is the fourth largest destination for exports from the country, according to data from Bloomberg.) Economists at the South African university, North-West, have said Brexit could take 0.1 percentage points off of the country’s annual economic growth, which already contracted 1.2% in the first quarter of this year.
Nigeria: bad timing
Britain’s exit from the EU couldn’t have come at a worst time for Nigeria, Africa’s largest economy. At a time when the government is trying to fix an economy on the brink of a recession by removing strict currency controls and also liberalizing oil prices, the immediate effect of Brexit will test the nerves of Nigeria’s economic managers as global markets plummet.
Bilateral trade between Nigeria and the UK, currently valued at £6 billion (about $8.3 billion) and projected to reach £20 billion by 2020, will be disrupted as trade agreements made under the auspices of the EU have to be renegotiated.
“For Nigeria, global risk aversion as well as softer oil price is likely to mean that new portfolio inflows are slow to materialize,” says Khan. “This may delay the normal functioning of the newly liberalized FX market.”
Data from the National Bureau of Statistics shows that the UK was Nigeria’s largest source of foreign investment in 2015.
A slowing British economy and its reverberating effects could signal a drop in investment, trade, and also remittances from the Nigerian diaspora who sent home $21 billion in 2015.
Reduced trade and investment from Britain will not necessarily be plugged by the rest of the EU, say Lagos-based economist Tunji Andrews. “The EU will be looking to strengthen its internal ties, plus there’s cheaper oil from Iran, cheaper labour from China and the eastern bloc. There’s really nothing we have as a competitive advantage to them right now.”
Brexit is already fueling other independence campaigns. Within hours of the vote, leaders in France and Holland, Italy and Denmark called for their own referendums on leaving the EU.
Kenya’s cut flowers
Kenya faces capital flight as investors seek safe havens like US treasuries, falling exports, and pressure on the Kenyan shilling. “It’s going to affect all of us and there’s no insurance, no position we can take to maneuver ourselves to be in a better position,” central bank head Patrick Njoroge, said last month of the possibility of the UK leaving the EU.
For now, the bank says it is prepared to handle any shocks with foreign reserves of 560 billion Kenyan shillings ($5.6billion), enough to cover five months of imports. Still, a weaker Kenyan shilling will make imports more expensive for a country whose import bill has been increasing more than 10% a year over the last five years.
One of Kenya’s top exports, cut flowers, could suffer, according to the Kenya Flowers Association. Over a third of the EU’s cut flower imports come from the East African country. And the UK and the Netherlands, another country threatening to leave the EU, are the top destinations for Kenyan exports, mainly flowers. If a trade deal between the East African Community and the EU is stalled because of Brexit, Kenya would be looking at a loss of 4 billion Kenyan shillings a month, according to the association.
Renegotiating trade deals is likely to “create more uncertainty for Kenyan exports,” according to Khan of Standard Chartered. Falling demand as a result of a slowdown or return to recession in the UK and the EU would also be bad for Kenyan trade.
But it’s not all bad news.
Kenya’s ties with Britain are deep and longstanding so bilateral trade and investment are likely to continue. In some ways Kenya could even benefit, according to some analysts. The UK may be eager to establish bilateral ties after leaving the EU, giving Kenya leverage.
The end of “British Outwardness”
Other countries on the continent are bound to be affected as well. In Egypt, the main stock index fell 1.3%, with investors worrying about a loss of British investment and demand for Egyptian exports. The central bank of Mauritius issued a statement today (June 24th) that it had raised its reserves of gold and US dollars to reduce exposure to the pound. “Should the need arise, the bank stands ready to take measures as appropriate to protect the best economic interests of Mauritius in the circumstance,” the regulator said.
Analysts question how Brexit will affect the EU’s support of agricultural subsidies, which critics say have hurt African farmers.
The UK has been one of the bloc’s most staunch opponents of these subsidies. African countries may also have less access to international capital markets and big infrastructure projects may have to be put on hold, according to Khan.
More broadly, analysts from Brookings Institution worry about how Brexit will affect the UK’s overall engagement with Africa. As head of the G8 last year, the UK pledged to double aid to Africa. The UK has been the largest funder to IDA17, the World Bank’s concessional borrowing program.
The think tank concluded in a blog post, “Perhaps the biggest impact of the Brexit on Africa would be the end of British “outwardness”—the country’s concern with and responsiveness to global development issues.”