How ‘BREXIT’ Will Affect Nigeria

How ‘BREXIT’ Will Affect Nigeria

Tuesday, June 28, 2016 8:03 pm


 

Buhari and Cameron

Buhari and Cameron

 

SPECIAL REPORT: THE IMPACT OF ‘BREXIT’ ON AFRICA (NIGERIA)

 

Following the UK’s surprise vote to leave the EU, we assess the probable impact such a departure would have on African trade, investment, and security policy. In a special report, EXX Africa analyses the impact of an eventual ‘Brexit’ on three of the UK’s most important African markets: South Africa, Nigeria, and Kenya.

Executive Summary:

  • The UK vote to leave the EU was based on a non-binding advisory referendum and does not guarantee the UK’s departure from the EU. However, months of political uncertainty throughout Europe will rattle global and African markets.
  • If the UK does leave the EU, the impact on many African economies will be short-term and relatively insignificant. The UK will have two years to renegotiate trade agreements with African countries.
  • The South African economy is now more likely to fall back into recession and extreme currency volatility indicates that a downgrade of its credit rating to non-investment grade in December is now almost inevitable. Bi-lateral security cooperation and aid programmes face less disruption.
  • The effective implementation of a new foreign exchange mechanism and liberalisation of the fuel sector will face fresh hurdles as the UK withdraws from the EU. Nigeria will also struggle to attract interest in new debt sales aimed at financing its expansive budget.
  • Kenyan markets were relatively stable following the ‘Brexit’ vote, although any disruption in EU trade negotiations would negatively impact the cut flowers export market. It is likely that the UK would prioritise trade negotiations with Kenya, which could even benefit Kenya and other EAC members.

On 23 June, the United Kingdom (UK) voted to leave the European Union (EU) in a non-binding advisory referendum, which resulted in the resignation of UK Prime Minister David Cameron and is likely to trigger fresh elections later this year or in 2017. Despite pressure from some EU countries, it is unlikely that exit negotiations will begin until a new UK government is firmly in place. There is a possibility that the next UK government will not trigger exit negotiations at all, based on a legal technicality or if it calls a second referendum.

Regardless of the probability of an eventual UK exit from the EU, the referendum result has caused market turmoil across the world, as investors worry that the result of the UK vote could drive fresh momentum to anti-establishment movements in other European countries. Global stocks lost USD2 trillion in value on 24 June and sterling fell to a 31 year low. UK companies and banks were some of the worst affected, with USD55 billion wiped off banking stocks. The price of commodities also fell, with the price of oil dropping 3.9% to USD50 per barrel. However, the price of gold gained 4.7% as a reflection of investors’ perception of gold as a safe haven. At the time of writing on 27 June, Asian stocks and the UK pound were extending losses.

In Africa, currencies, stocks, and bonds also tumbled as a result of the UK referendum vote. The South African rand fell by 8% against the US dollar, before recovering to trade at 3.6% weaker, while falling to a record low against the Japanese yen. Investors are worried that African countries will have less access to international capital markets, which would halt large infrastructure and other projects. There is also a concern that the UK will now disengage from Africa, as its economy inevitably slows, and foreign aid flows are cut. While the UK has a firm commitment to spend 0.7% of its gross national income (GNI) on development aid, an eventual recession in the UK would decline GNI in absolute terms and thus diminish development aid to Africa.

Moreover, any trade deals that the UK has in place with African countries are essentially trade agreements with the EU, which has exclusive jurisdiction over its members’ trade deals. Any exit from the EU could terminate the UK’s access to the EU’s single market, forcing the country to negotiate new trade accords with African countries, which is likely to be a cumbersome and lengthy process. It is however likely that the UK would leave many existing trade agreements in place and thus mitigate risk of trade disruption. In this special report, EXX Africa assesses the likely implications of a UK departure from the EU for some of the UK’s top African trading partners, as well as other implications on wider investment and security. We analyse two key drivers of risk, firstly the impact of a ‘Brexit’ on existing trade and other arrangements with the EU, and secondly the longer term effect of a probable economic slow-down of the UK economy, which is the fifth largest in the world with substantial ties to the African continent.

IMPACT ON NIGERIA

The effective implementation of a new foreign exchange mechanism and liberalisation of the fuel sector will face fresh hurdles as the UK withdraws from the EU. Nigeria will also struggle to attract interest in new debt sales aimed at financing its expansive budget.

The main impact of a ‘Brexit’ on Nigeria would be further deterioration of the country’s already struggling economy, which has been caused by the fall in global oil prices and a steep drop in local crude production due to an insurgency in the Niger Delta. There is extensive trade and security cooperation between the UK and Nigeria that would be likely to face several years of disruption as the UK departs from the EU. Nigeria is the UK’s second-largest export market in Africa. Bilateral trade between the two countries is currently worth USD8.3 billion and projected to reach USD25 billion by 2020. The UK is also Nigeria’s largest source of foreign investment, with assets worth over USD1.4 billion. Moreover, UK-Nigerian remittances account for USD21 billion a year. The UK is also one of the largest development assistance donors to Nigeria, although Nigeria is not as aid-dependent as most continental counterparts.

Adeosun:  Minister of Finance

Adeosun: Minister of Finance

A slowing UK economy on the back of a departure from the EU and potential disruption as the UK renegotiates its trade agreements, would be likely to reduce trade flows, foreign direct investment, and Nigerian remittances. There is also no guarantee that other EU countries will make up the UK shortfall in trade and investment, as other EU countries look to Iran for more reliable access to oil and to Asia for cheaper labour. On 24 June, Nigerian stocks ended a three-day rally, falling 1.4% over worries of Britain’s vote to leave the EU. Nigerian banks, such as Fidelity Bank and Zenith Bank, recorded the biggest losses. Nigerian stocks had previously rallied 8.5% after the government floated the naira and ended a highly controversial currency peg.

As a result, new portfolio inflows will slow, which will hamper the implementation of the country’s new foreign exchange mechanism. On 20 June, the central bank introduced a more flexible foreign currency policy, removing a de facto peg of around 197 naira to the US dollar. The naira’s 16-month peg to the dollar had overvalued the Nigerian currency, resulted in an economic contraction, and harmed investments. The implementation of the fuel sector liberalisation, including the termination of a burdensome state-subsidy scheme, would be likely to face implementation issues. The sector’s liberalisation will add to fuel importers’ margins and will allow shipments of fuel to resume.

Godwin Emefiele, CBN Governor

Godwin Emefiele, CBN Governor

The liberalisation of the fuel marketing sector and the proposed introduction of a flexible exchange rate are both aimed at soothing foreign investor concerns and to attract new fundraising to finance a record budget deficit widened by a fall in oil revenues. The effective implementation of the new currency regime and establishing its credibility will be key to attracting new foreign direct investment and portfolio flows. Finance Minister Kemi Adeosun is due launch a planned eurobond sale later in 2016. The government plans to raise USD10 billion of new debt of which USD5 billion would come from foreign investors. Much of this planning would be delayed as risk averse investors steer away from Nigerian debt.

General Abayomi Gabriel Olonisakin: Chief of defence staff

General Abayomi Gabriel Olonisakin: Chief of defence staff

Beyond trade and investment, the UK is also a key partner in Nigerian security. The UK has been crucial to drawing international attention to the Islamist Boko Haram insurgency in Nigeria’s northeast. There is a risk that the UK would become distracted from international security threats, such as those by Boko Haram, as it negotiates its departure from the EU. However, the US and France have proven more crucial partners than the UK in combating Boko Haram, thus mitigating the effect on counter-insurgency efforts.

Read more at:  http://www.exxafrica.com/special-report-the-impact-of-brexit-on-africa/


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