Hot on the heels of the successful Africa Forum at the Hogan Lovells London office earlier this year, Hogan Lovells South Africa recently hosted its first Africa Forum in Johannesburg. The...18 October 2016
In conversation with... Edward George
Hogan Lovells' Africa Practice presents the 'In Conversation' series – a collection of interviews with leading industry and legal experts to share their views and experiences of working in Africa and the effects of global events on African markets and businesses.
Our initial posts will focus on Brexit and its impact on Africa. This week, we ask Edward George (head of Research at Ecobank, the pan-African banking conglomerate, with operations in 36 African countries) for his thoughts.
1. Overall is there a material impact on Africa from Brexit short and long term?
The EU is an important trade, diplomatic, economic, investment and aid partner for Africa so the split of the UK from the EU will have huge repercussions within the continent.
In the short term, we will see volatility with respect to inflows of remittances, foreign direct investment ("FDI") (there is likely to be a drop from both the UK and other European countries), African currencies (the dollar is continuing to strengthen) and investment outlook. The majority of trade deals are effectively on hold as Africa waits for some clarity regarding Brexit and in the medium to long term this could delay any kind of economic integration in Africa.
In terms of currency, the countries in the Communauté Financière Afrique ("CFA Franc Zone") will suffer the biggest impact. These countries have benefited from the Euro peg which has helped them to maintain a stable currency, kept inflation low, and helped these countries to raise debt (because if you raise debt in CFA francs then you are effectively raising it in Euros, because Francs are pegged to the Euro and the peg is guaranteed by the French Treasury). However, the weakening of the Euro and uncertainty about the Eurozone, all of which has been exacerbated by Brexit, could bring greater volatility to the CFA Franc Zone.
2. What are the most significant impacts in your view?
Although currency volatility in Africa has eased over the last 18 months, some currencies continue to struggle (for example, the Nigerian Naira, the Angolan Kwanza and the Zambian Kwacha). Some currencies are also suffering because the national government has fallen out of favor with the international community. Malawi and Mozambique, whose governments are having a major clash with donors and Development Finance Institutions ("DFIs"), are two key examples.
In my view, the biggest impact of Brexit on Africa is the waning of trade and investment caused by the uncertainty over the Brexit negotiations. This uncertainty means that many investment decisions will be deferred and this has a trickle-down effect in every direction. European businesses will want to assess their core businesses in Europe before investing in Africa. For African exporters, there is going to be a drop in demand in the UK and there is likely to be a similar drop in the EU too because of slowing economic growth. All of this will happen whilst Africa is not on the agenda of anyone who is trying to work out on what terms the UK will withdraw from the EU. The impact of this decline in investment, FDI, trade flows and demand is a slow reduction of trade flows between Africa and the EU.
3. How can African nations and businesses begin to position themselves to mitigate any adverse effects of Brexit and how can African nations maximize any opportunities presented by Brexit?
In one sense, African nations can put pressure on the UK by pushing back on trade agreements until a degree of certainty is established. We have already seen attempts at this with regards to Economic Partnership Agreements ("EPAs"). The few that have been signed contain several caveats. The EPA for the East African Community (the "EAC") was also due to sign last month but Tanzania and Uganda are both refusing to sign because of the uncertainty created by Brexit.
4. How will Brexit define future engagement between African nations and the EU/UK especially in the context of trade agreements?
There has been a lot of criticism of EPAs as they do not support the industrialization of Africa and are structured in a way that allows Western companies to dominate African economies. With Brexit, the UK has an opportunity to take a different approach and negotiate trade deals that are in the interests of both parties. It might be valuable to focus on a few key areas of interest and conclude special deals in a way that exploits the best of British openness and innovation and African ingenuity and knowledge of local markets and consumers.
5. Will other countries outside the EU be able and/or willing to enhance their role in Africa?
Yes indeed, but I don't think that this is anything to do with Brexit. China will continue to be important (they are currently the largest single off-taker of African goods, whilst the EU as a region is the largest single trade partner). China invests more in Africa than the aggregate of funds invested by DFIs such as the World Bank and the African Development Bank. There are huge trade flows already between India and Africa but I anticipate that there will be more investment in manufacturing, logistics and distribution. There is also a lot of appetite from Asia, particularly Japanese and Korean Banks, but as they do not know African markets well we have seen them exercise some caution. Another country which I hope will show an increased interest in Africa is the USA. The USA’s trade flows with Africa have stagnated over the past decade, steadily reducing the country’s importance as a trade partner.
6. Which industries do you see as the most vulnerable to the changes that are likely to occur in the wake of Brexit?
Anything to do with export and import, particularly the horticulture industry (Kenyan cut flowers, vegetables etc.) is under threat as these businesses were largely set up on the understanding that African countries such as Kenya, Tanzania and Ethiopia could export these goods tariff free to the EU. This is now in question.
One of the greatest successes in Africa is Fintech/disruptive technology, and many of these successes have a British origin. Take M-Pesa, which was developed by Vodafone UK using £1 million from DFID in a tech hub in Cambridge, and which is now the most successful mobile money transfer system in history. The man who created M-Pesa subsequently established M-Kopa (which distributes power through individual solar units), and its closest competitor, Azuri Technologies, is currently in the same building in which M-Pesa was created. I don't foresee any setbacks for Fintech from Brexit. Rather I think investment in these companies is likely to pick up, particularly in the disruptive fields of block chain, bitcoin and drones.
7. Many have seen the UK as an important voice for Africa within the EU. Do you think that the EU is likely to adopt more protectionist measures once the UK withdraws its membership from the Union, for example in agriculture? Do you see any other countries within the EU assuming this voice once the UK has left the EU?
The CFA Franc Zone is closely linked to the French state. The region’s common shared legal structure, the Organization for the Harmonization of Business Law in Africa ("OHADA"), is based on Napoleonic law, they use the French language and they use a single currency guaranteed by the French Treasury. France also offers military support to most countries in the zone, notably Mali. As such, following Brexit it is logical that the French will be leading the EU’s engagement in Africa. It is likely that there will be a realignment of EU policy towards Africa and I think that we could see two separate Africa policies develop. The UK is the largest contributor to EU aid programs and EU development programs. I think that British policy towards Africa in a post-Brexit environment could be very favorable towards the Commonwealth and Anglophone countries whereas EU policy is likely to be focused on Francophone countries. This is a shame because without the UK, the EU is likely to downgrade its relationship with Africa’s two largest (Anglophone) economies, Nigeria and South Africa.
A more general concern is that the EU will lose British influence which has acted as a handbrake on the EU’s more excessive, protectionist or overly socialist regulation (and some countries were grateful for this). It's difficult to predict what the EU will look like without the UK providing this influence, but it is likely to be more protectionist.
8. There has been a greater move towards interdependence (e.g. the establishment of regional-economic communities such as the EAC and the Economic Community of West African States ("ECOWAS")) and, in some ways, the EU has been a benchmark against which these unions can model and measure themselves. Is regional integration to be affected by Brexit? We recently saw the launch of the all-Africa Passport, for example, which may be seen by some to be a step in the right direction.
I think that the launch of the all-Africa Passport (a single common passport that grants holders visa-free access to the member states of the African Union) is similar to plans to have a pan-African currency – it is a very nice idea but practically, it is hard to see how it will be implemented. With the all-Africa Passport, I expect that some countries will recognize it and will strike deals between themselves to reflect this. It is currently easy to travel within certain regions (for example, the EAC or ECOWAS). However, the idea that this will extend throughout the whole of Africa is difficult to imagine, especially as there are concerns within Africa about controlling migration flows.
I think that there will be reluctance amongst African nations to integrate further because of the uncertainty surrounding trade relations caused by Brexit. I think the existing regional economic groupings are sensible and African nations should continue to integrate these before they begin to consider linking with other areas. The CFA Franc Zone is well integrated but many West African countries are not integrated at all in practice. The EAC also has fairly good integration but they have just accepted South Sudan as a member, which is in the middle of a civil war so it remains to be seen how it will integrate into the EAC. Additionally, the South African Development Community ("SADC") remains dominated by South Africa. I would not expect any country to secede at this point in time. It is not in anyone's interest to do this.
I do think that Brexit could slow the process of linking the Eastern side of Africa (i.e. SADC, the EAC and the Common Market for Eastern and Southern Africa ("COMESA")) to create a single free trade zone.
In terms of the effects that Brexit will have on nationalism in Africa, I do not see that there is a direct link. The issue of Brexit is a unique case. Britain is central to global markets and British business is very influential globally. The only similar comparison I could see would be if California wanted to secede from the US (as I think that California, on its own, is the sixth largest economy in the world). However, I do think that Brexit could inspire greater nationalist sentiment in Europe, where there has been talk of Frexit or Frack Off, Italeave and Germalone!
9. What impact will Brexit have on aid into Africa?
I do not think that overall aid will necessarily reduce to Africa but the way in which aid flows into Africa will definitely change. The UK is the only developed country in the world which has met its own targets for aid (0.7% of its gross national income) and the UK has pursued this target quite aggressively. Post-Brexit, I can see British aid rising in Africa for certain countries, particularly the leading Anglophone ones. There could, however, be a reduction in aggregate aid flowing from Europe to Africa because Britain is the largest contributor to the aid budget in Europe.
10. What lessons can Africa learn, if any, from Brexit?
Democracy often throws up very awkward, inconvenient and difficult results but they are not necessarily wrong. It is true that the Brexit vote was close but to suggest that the 4% margin of difference (which represents 1.6 million people) is entirely made up of people who were uninformed or did not know what they were doing is not held up by the facts. I think that in the long term Brexit could be good for both the UK and the EU, provided it is negotiated effectively.
African countries may watch this situation closely and also learn from the way in which the UK has reacted to a situation that it did not expect. I think that the new government so far has handled the situation very well, appointing teams to prepare the UK’s position and holding off on invoking Article 50 until the UK is ready. But there is a long road ahead and no one knows how this will turn out: for the UK, the EU and Africa.
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