Last week the British people voted by a small margin to exit the European Union (EU) – now commonly known as the “Brexit”. This momentous event created uncertainty, debates and speculation internationally, including in South Africa. In the post-World War era EU member states pursued closer integration and co-operation, with the hope of minimising the risk that individual countries could destabilise the region in the pursuit of own nationalist interests. For the first time, however, the British vote shows that national interests are again gaining precedence over international priorities. Britains’ dominance in world political and economic affairs, however, entails that this retreat affects many nations beyond the EU.
Why did Britain decide to do a referendum on whether to leave the EU or not?
Following the 2015 general election, Prime Minister David Cameron pledged that a referendum would be held by the end of 2017, to decide whether Britain should remain in the European Union or not. Some of the main points of contention included national sovereignty, immigration and the large fees that Britain had to pay to be a member of the EU. Counter arguments include a lack of mobility across Europe and the need for the UK to negotiate new trade agreements with many nations, independent of those in place for all EU member states.
What was the forecast for South Africa?
Before the referendum took place, South African commentators forecast greater local economic uncertainty, particularly in relation to exchange rates. Future trade relations have also become tenuous, given that South Africa has simplifying agreements with the entire EU, which may no longer apply in its interactions with Britain. The Rand suffered along with the Pound in the hours after the referendum concluded. Rand losses have recovered somewhat, though uncertainty about the future remains. In hindsight, some economists agree that the effect of the Brexit vote on South Africa as an emerging market, will not be as significant as many perceive.
More concerning is the potential for Brexit to initiate further fracturing within the EU leading to other countries’ departure from the bloc. This, in turn, could lead to reduction in South African trade with all EU countries; together the bloc is an important trading partner for the country. According to figures from the Department of Trade and Industry, South African exports to the EU reached R216-billion in 2015. Significant losses in export revenues would arise if South Africa’s trade agreement with the EU becomes largely ineffective due to many countries’ movement out of the bloc.
What are the implications of the exit for South Africa?
Last Friday, Finance Minister Pravin Gordhan claimed that South Africa’s financial institutions would be able to resist the effects of Brexit. Gordhan acknowledged that the British decision was significant and could have consequences for South Africa, but it would take two years of negotiations to conclude the exit. There would therefore be sufficient time for the parties concerned to make necessary adjustments to treaties and trade agreements to prevent disruption and losses.
Gordhan also said that the efforts displayed by government, labour and business to ensure that our economy is stable, reassure the financial markets. The measures encourage sustained internal and external investment, as our country’s institutions and banking industry are resilient. Similar arguments were recently offered in preventing a downgrade of South Africa’s sovereign debt to junk status, though it will be necessary to sustain economic growth and pursue credible economic policies to continue in this position.
Despite the current turmoil, reasonably strong trade links between South Africa and the European Union and Britain are based on solid agreements, which could prevent future disruption.
Even though the Rand had weakened soon after the announcement, the dip was not worse than other declines in the past month, according to Izak Odendaal, an investment analyst at Old Mutual. “Financial plans and investment strategies should be built around life events and life goals, not changes in market volatility.” A diversified portfolio is the answer to managing the imminent uncertainty in investing rather than compiling a fearful concentrated portfolio of gold or cash.
Even though most of the implications don’t seem too daunting for the near future, Nosibusiso Ngqondoyi, head of research at Novare, predicts that the effects may be serious in the long-run.
“Therein lies the biggest risk and the potential contagion effects this might have on the global economy already faced with problems ranging from weak growth, deflation, high unemployment, and high debt to GDP levels, among others,” she said.
The immediate negative effects of Brexit appear to be short in duration. More importantly is whether similar action by other EU members, which will destabilise many existing international agreements, could follow. Is this the beginning of a shift in global politics? Pertinently, South Africa should re-position itself in this new milieu to ensure continuity and prevent risks of credit downgrades; the most important goal is to ensure that local fundamentals remain in place to shield against external volatility.