In the wake of the oil crash, the Central Bank of Nigeria (the “CBN”) in Q2 2015 took the decision to peg the Nigerian currency to around N197 to the US dollar. This move,...28 June 2016
Brexit: Britain sneezes – will Africa catch a cold?
The UK has voted to leave the European Union (the "EU") in an historic referendum and its ramifications will inevitably be felt across the globe. So what does this mean for Sub-Saharan Africa? The only thing that we know for certain at this stage is that there are a lot of unknowns, largely because the form that Brexit will take when and if Article 50 of the Treaty on European Union is triggered, has not yet been confirmed. Despite this, some key issues (outlined below) have already become talking points amongst those with an interest in Africa.
Some are worried that the uncertain climate will encourage capital flight from Africa and force investors to look towards safe havens. However, early responses have been mixed. Whilst investors may avoid risky assets such as oil (oil prices fell by over 6% the day after the referendum according to reports from CNBC Africa), commodities such as gold and other precious metals have seen a sharp increase in value. The credit profiles for gold mining companies, Ashanti Gold and Gold Fields, recently reflected this (both saw a 9-11% increase in value in the weekend following the referendum).
But the impact of the UK on Africa should not be overstated. Combined data from the Office for National Statistics and the United Nations Conference on Trade and Development shows that, in 2014, the UK contributed only 16% of the total foreign direct investment ("FDI") flows into Africa and this investment has been proportionately reducing since that time.
Investment via development aid may be a more pressing issue. For many years, the UK has donated a significant amount of financial aid to help improve the infrastructure existing within African countries via the EU aid programmes, and has been a leader in many initiatives. The UK has already committed 0.7% of its Gross National Income to development aid and, in the short term, it is unlikely to backtrack on this promise. However, the UK has played a key role in Africa (for example, Somalia peacekeeping) and in a disrupted landscape the possibility of a reduced Africa focus will be real.
There has also been a visible impact on the value of African currencies following the uncertainty generated by Brexit. Reuters confirmed that the South African Rand lost more than 8% of its value against the dollar, becoming the worst performing currency in the global markets, after the British pound sterling. The immediate aftermath of the referendum is showing that efforts to promote economic stability in Nigeria through Nigeria's recent foreign exchange policy, which de-pegged the Naira against the Dollar, may be hindered too, alongside other headwinds. Overall the currency market fluctuations appear likely to continue.
There are numerous trading arrangements that exist between the UK and Africa. The UK is an important trade partner for many African countries and much of its relationship with Africa is governed by deals and policies negotiated via the EU. An important question which investors in Africa, importers into the UK and regional bodies such as the Economic Community of West African States ("ECOWAS") and the East African Community (the "EAC") will therefore consider is whether future agreements with the EU will continue to grant favourable access to the UK if the UK finalises its exit from the EU, and the extent to which these will reflect current policies and sentiment (e.g. on anti-protectionism). Obviously, it will be necessary to negotiate new standalone bilateral agreements and parties to any agreements which are yet to be finalised (e.g. the EAC, which is in discussions to sign an Economic Partnership Agreement with the EU and Nigeria, which is yet to sign the Economic Partnership Agreement between the EU and ECOWAS) will likely wait for some clarity before progressing. Who will be at the front of this queue?
It is too early to gaze into a crystal ball, but clearly there will be significant, and in many cases unforeseen, consequences for Africa and trade in Africa.
We will continue this conversation with key experts on some of the issues raised within this article, as well as others that arise as the situation unfolds, so please continue to check our Blog for updates and our Brexit website. In the meantime, should you have any questions on Brexit, please do not hesitate to contact our dedicated Constitutional Change Taskforce or email us at firstname.lastname@example.org.
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