Brexit’s risk for East Africa’s economy

July 13, 2016

Britain’s exit from the European Union, might be a distant affair for many Africans who only bother about the English Premier League more than its political affairs. But it may be hard to remain oblivious to it because its impact could reverberate into the East Africa Community(EAC) economies.In a referendum held few weeks back, the people of the United Kingdom voted for Britain to leave the EU, after more than 40 years of being part of this giant political and economic bloc.The result of the UK referendum is unprecedented, because no country has ever left the now 28-nation EU. The vote could have enormous economic consequences, not only in Europe but also further afield and that include East African region.A Brexit would not directly affect the EAC economy, but the global uncertainty it would create would sooner or later exacerbate external risk facing East African Community member countries.The first thing to look at when assessing the impact Brexit might have on the EAC economy is exports to the UK, from which I can conclude that the impact isnt huge as such. This is correct as far as exports are concerned. Last year EAC exports to the UK amounted to less than $2 billion.EAC total trade with the UK only amounted to less than $3 billion. Compare this with EAC $12 billion in trade with China, or $9 billion with the US.But what is worrying about Brexit is its impact on EAC’s trading partners. The UK’s economy is the fifth largest in the world, and it is the largest trading partner of the EU. Its trade with the US and Japan, and even China, is also significant. With its investment flow and trade disrupted by Brexit, and with its unemployment rising, the UK economy could slip into recession.

The EU economy, already suffering from anemic growth, high unemployment, high levels of debt and mass immigration from the Middle East and north Africa, would be hurt further by the Brexit. EAC non-oil exports to the EU up to May this year were worth $4.7 billion, the second-largest destination after the US. If the EU’s economy stalls after Brexit, EAC exports to the EU, which are mostly commodities, would also be affected. The further weakening of global growth would make the prospect of commodity prices recovering more distant. The oil price fell 5 percent on the day of the Brexit vote, and this could be a sign of what would happen to the price of other commodities. This would put further pressure on EAC exports, which still very much depend on commodities.The impact of Brexit will reverberate through EAC’s capital market. The Nairobi Securities Exchange (NSE) slipped by less than five per cent, a modest decline compared with its peers in other regions. The shares of the big banks were badly hit, as happened in other countries, as the risk of declining global liquidity mounts. But with volatility continuing in the global market, it would be hard for the NSE to resist the downward pressure.A sell-off on the same scale could not be ruled out, as investors try to avoid risk, and capital flees to safe-haven countries. The moderating influence on this negative trend perhaps would come from the attractiveness of Kenya’s sovereign bonds, because their yield is higher compared with bond yields in other countries.

At this point it is not clear whether the economic impact of Brexit would just be a normal crisis, or would rival the closure of Lehman Brothers in 2008 that plunged the world economy into the worst recession in history.Whatever the outcome it is important for EAC central banks, to continue in their accommodative mode in terms of monetary policies. It is important for the financial regulators to be given more clear functions and responsibilities, so that they can supervise the banking system more effectively, should a banking crisis arise from the Brexit. And as the parliaments across the region are finalising their deliberation on the 2016 to 2017 budget estimates, it is important for them to note the impact of the market turmoil caused by the Brexit on their country’s economy. This is to make sure that the assumptions used in the budget regarding GDP growth, exchange rates and oil prices are not out of line with the new realities. The market turmoil from Brexit has thrown the global economy into uncertainty, as investors around the world assess its impact.According to experts, it would take two years until Brexit was formally finalised. Until the outcome of negotiations is clear, it will be difficult for investors to make decisions. We know that uncertainty is the biggest enemy of investment and growth.EAC countries government have to assess how much this situation will affect investment in the region.EAC region has gone a long way in issuing their economic packages and deregulation measures, and in building infrastructures like standard gauge railway line in Kenya, planned oil refineries in Uganda, gas pipeline in Tanzania among others but they have yet to attract investors. Now with the market turmoil from the Brexit, the task of attracting investors will be more daunting.

Contador Harrison