How will Brexit affect Botswana?
Correspondent | Thursday June 30, 2016 14:53
On 24 June, the announcement of a ‘yes’ vote for Brexit sent the markets on a panic mode and saw one of the biggest falls in the FTSE’s (UK stock index) 32-year history, as the FTSE 100 index dropped by around 500 points, or more than seven percent- and this came after the pound hit a 31-year low against the US dollar overnight. A number of companies also saw 20% or more wiped off their values. Banks have been badly hit, as have household retailers. The elite investors also lost over US$3 trillion in a matter of hours and some Euro stocks even collapsed more than the FTSE itself.
Why does this Brexit matter?
Simply put, the world economies are fragile as it is and do not need any further market disruptions as that will slowdown recoveries and might magnify the existing financial seismic waves. World growth already remains subdued and is expected at sub-3% levels; advanced economies are battling prospects of deflation and low or negative interest rates which are wiping out profitability of banks; low commodity prices are causing pains for many countries, especially sub-Saharan Africa region, Botswana included; monetary and fiscal policies remain divergent and many emerging markets currencies like the rand remain weak and extremely volatile. In addition, some geopolitical tensions in the Middle-East have continued to disrupt market normalcy, whereas other natural causes of extreme flooding, drought and current El-Niño is worsening poverty and income inequality on most emerging markets and low income developing markets. SADC has already declared the current drought the worst in the past two decades and thus food aid and relief measures will be key to avert hunger and famine.
The UK does not necessarily form a major part of world economies in terms of size, however, it has been a nexus for the financial services.
Post crisis period, a lot of investors found Britain as a safe haven and thus uncertainty around UK markets outside the EU will result in significant funds outflows in search of more stable currencies like the US$, Yen or Swiss Francs. There is also a risk of other EU countries seeking to exit and that will put a shadow of doubt over the euro and the largest trading block in the world. The results of the vote, which was largely not influenced by a matter of economics, will likely see downgrades to the credit status of UK and maybe even some recessionary periods. The UK economy is fragile as it is, given that:
l UK has the largest current account deficit of 4.3% of GDP (IMF, 2016) – making it the largest current account deficit of any advanced economy
lBudget deficit of 3.6% of GDP, topped only by Japan and Greece
lUS$2.2 trillion debt outstanding, making it the third largest in the world after the US and Japan
l Turbulent property market
What could this Brexit
mean for Botswana?
Given the Brexit win, there are some anticipated spill-overs to Botswana fundamentals. The risks to Botswana trade exports, primarily beef, will magnify if the contagion effect of a Brexit destabilises the euro and the EU as a trading block, especially given the recently signed bilateral agreement (Economic Partnership Agreement between SADC and EU). Botswana’s exports to Europe are 16.2% (March 2016), compared to 18% in April 2015; this compares to exports to UK at 5.4% and 1.95% in March’16 and April’15 respectively. Conversely, imports from UK were 0.28% and 2.8% in Mar’16 and April’15 respectively; compared to imports from EU at 5.7% and 6.5% at the same periods.
Assuming the worst case scenario from a Brexit, these could be the effects on Botswana: Botswana primary export to EU is beef and has an access to the European market through Economic Partnership Agreement (EPA) which facilitates free flow of trades. With UK leaving, there will have to be trade negotiations on terms of trade with UK market for exports and that might take some time as the country undergoes structural reforms. This might limit access to UK market in the interim and thus negatively affect beef exports receipt in the short-term. Comfort can be drawn from historical and post-colonial ties of Botswana and UK, which means there is still good probability that bilateral agreements between Botswana and UK will be favourable for terms of trade, post a Brexit; The Brexit also causes uncertainty on the EU as some other members might consider and exit from the union which might complicate trades with Europe and thus slow trade prospects for Botswana; Additionally, the pula is pegged to the pound in the 50% weighting of the SDR. Inherent pound weaknesses, and consequent USD strength means pula will weaken further against the USD which will affect balance of payments in two folds – servicing USD debt repayments will be expensive; receipts for diamond receipts will be higher in USD terms given a stronger USD, the extent of which will depend on affordability for non-USD markets like Asia whose demand for diamonds has been increasing (especially that affordability might become a problem and thus reduce diamond demand). In the short term, GBP weakness will have spillover effects of Euro weakness and USD, Yen and Swiss Franc strengthening. Given the pula pegging system, 50% of the SDR in the basket is allotted as: US$ – 42%; Euro – 37%; Yen – 9% and GBP – 11%. As a result, pula will undergo swings of strengthening against rand; weakness against the SDR, dominantly the US$ and the Japanese Yen;
Indirectly, uncertainty of UK outlook post a Brexit could result in further capital outflows from UK and Europe, with primary destination being the US, a dollar market. This will likely result in further strengthening of the USD – which is a negative for commodities market. This means further USD strengthening will result in further stresses on the commodity prices. In terms of Botswana minerals, nickel and copper prices might fall further and put further strains on mineral revenue and a fiscal budget that already envisages a cumulative deficit. Price pressures will add on a strain to BCL and Tati Nickel, and potential coal export projects; The UK and EU ties to Botswana come with some social and financial assistance in donor funding, budget support and education and cultural support. The structural reforms that come with a UK outside EU could imply that the extent of the exchange between the two sovereigns might be revised in the short-term as the country ring-fences its policy responses. It is worth noting that the extent and continuity of spill-over effects of the Brexit to Botswana and other markets will be dependent on how the Bank of England and UK and EU governments react to economic disruptions in the UK. Given the size of Botswana’s capital markets in both the sovereign and private sector listings, it is unlikely that capital FDI’s inflows from UK and Europe will find its way to Botswana and thus our capital markets are not expected to have causality effect from the UK stock markets;
Policy reactions expected are further easing and rate cuts by central bank of Japan, Bank of England and ECB. The South African MPC might still have room to hike further in 2H16. Bank of Botswana will be expected to remain accommodative and now more likely to hold rates at 6.0% for the rest of 2016, and;
The local organisations which have UK origin might face a trickle-down effect of structural restructuring of operations in subsidiaries, most prominent being the financial sector (predominantly banking). However, any effect on local businesses is expected to be minimum and far and apart. Beef industry already remains fragile with exports below five percent thus the drought effect will be felt more than effect of an uncertain beef export market.
Botswana does not have local companies based in the UK and thus erosion of funds repatriations will be limited to fund investments for maturing pension and other funds (to the extent of the pound losses).
*Moatlhodi Sebabole is the Research Manager of First National Bank of Botswana(FNBB). He writes here in his personal capacity