East Africa braces itself for implications of UK-EU exit vote on economies, trade

British Prime Minister David Cameron. AFP PHOTO | LEON NEAL  

 

By The EastAfrican Team

In Summary

• East African economies are bracing themselves for the consequences of Britain’s vote last week to leave the European Union.
• Likelihood of recession in UK will affect exports from region; investment will slide; and volatility in global financial markets could trigger capital outflow.
• According to Razia Khan, the turmoil in global financial markets as a result of the UK’s Leave vote would increase pricing for bonds, making it difficult for regional economies to access international capital markets for funding.
• Trade experts and economists in the region say Britain’s decision to exit the 28-member EU would distort existing trade pacts and call for fresh agreements.

East African economies are bracing themselves for the consequences of Britain’s vote last week to leave the European Union.

Central banks said they needed to monitor the immediate impact of the vote on money markets, before they could begin to consider interventions to tame volatility.

“The Central Bank of Kenya stands ready to intervene in the money and foreign-exchange markets to ensure their smooth operation. Other major central banks have also announced their readiness to intervene to minimise disruption in their markets,” said a statement issued on Friday morning as international media reported that the pound sterling had dropped to a 31-year low following the vote.

In an interview with The EastAfrican ahead of the vote, CBK Governor Patrick Njoroge had warned that a Leave vote could push emerging markets into a recession, a situation that would necessitate the use of monetary policy to ensure stability.

READ: Kenya says ready to intervene amid Brexit

Bank of Tanzania Governor Benno Ndulu said the Brexit was likely to affect the markets: “It is a bit early to say now but we are following very closely because some knew that this would happen and they had already taken measures to arrest the situation.”

In Uganda, Stephen Wandera, director for financial markets at the Bank of Uganda, said there was no significant change in the shilling-pound sterling exchange rates.

But, he cautioned that the gains made by the US dollar as the pound sterling weakens, could affect the Ugandan currency. The Uganda shilling, he said, would react to internal factors, including the approaching deadline for filing tax returns.

“The dollar will face more pressure, as corporations sell their foreign-exchange reserves to pay taxes,” he said.

Eurobond market

“The vote for Brexit is negative for emerging and frontier markets because of the uncertainty that it now creates. We are in a risk-off environment, and many asset markets in developing countries will sell off because of this result. For markets such as Kenya, with twin fiscal and current account deficits, this means that external financing of these deficits is likely to become more difficult,” said Razia Khan, chief economist and head of African research at Standard Chartered Bank Plc.

According to Ms Khan, the turmoil in global financial markets as a result of the UK’s Leave vote would increase pricing for bonds, making it difficult for regional economies to access international capital markets for funding.

“Kenya has been looking to borrow externally through the Eurobond market in the new fiscal year 2016/2017. Any continuation of global market volatility will have implications for the price at which all sub-Saharan African sovereigns are able to borrow,” said Ms Khan. SEE VIDEO

Kenya’s Cabinet Secretary for National Treasury Henry Rotich said the flow of funds from Europe would certainly be affected because of Britain’s standing as a European financial hub.

“We are looking at what is happening on the financial side, since Britain is a financial hub in Europe and Kenya has been well integrated in the global economy. Obviously any development that affects the flow of finance from Europe or any other market will have some impact on our financial markets,” said Mr Rotich.

The EU is the main export market for Kenya’s cut flowers.

According to the Flower Council, the floriculture sub-sector has recorded the highest growth in volume and value of cut flowers exported over the years, with Kenya attaining lead supplier status to the EU against its competitors.

The Kenya National Chamber of Commerce and Industry (KNCCI) said EU member states would demand trade tariffs be renegotiated with the British, thus making exports to the EU through Britain more expensive.

In addition, EU member states would begin treating countries trading with UK with suspicion, according to KNCCI.

“The UK’s exit from the EU will complicate the equation of doing business with the EU. We had one policy on trade and investment with Europe that is now going to be separated because we shall need a new trade policy with Britain,” said Laban Onditi, national vice chairman of the KNCCI.

According to Polycarp Igathe, chairman of the Petroleum Institute of East Africa and a trustee of the Kenya Private Sector Alliance (Kepsa), the events in the UK could lead to the weakening of the pound sterling against regional currencies and this could make exports from the region more expensive in the UK.

Tourists from the UK could also find EAC more expensive.

“Our products in the UK will be expensive and tourists will find Kenya an expensive destination,” said Mr Igathe, adding, “I think in my view the real direct impact is the Kenya shilling becoming stronger than the pound and this will mean Kenyan exports will be expensive in the UK and tourists from the UK will find Kenya expensive,” he added.

Tanzania optimistic

However, Tanzania remained optimistic.

Minister for Industries, Trade and Investment Charles Mwijage told The EastAfrican the country would continue strengthening business and trading ties with the UK.

Trade links between Tanzania and the UK will remain intact, except for business under European Union protocols, but major economic links between the two countries would not be affected. 

“Our trade with the United Kingdom will not be affected. Britain is Tanzania’s leading European trading and investment partner. UK investors rank on top in the list of foreign investments in Tanzania where out of three foreign investors, one is a British company,” said Mr Mwijage.

Acting director of marketing for the Tanzania Tourist Board Phillip Chitaunga said tourism contacts between the UK and Tanzania would stay strong despite Britain’s exit from the EU because European countries trade individually with Tanzania in the tourism sector.

He said the UK is the second biggest source of tourists after the United States. Around 75,000 British nationals visit Tanzania every year.

“We sell Tanzania safari packages to each European country individually,” said Mr Chitaunga.

Lessons for EAC

In Uganda, experts said the vote may not have an immediate effect other than to offer lessons for the East African Community.

Chris Magoba, the spokesperson for the Ministry of East African Community Affairs, said the rest of the world saw integration as the way to go.

“The United Kingdom’s decision to exit is one small thing when compared with how nations are coming together across the world,” he said.

But, Sam Watasa a former consultant for the Ministry of Trade on East African Community Affairs said it is unwise for leaders to push the integration agenda without the people, adding that Britain voted to leave despite advice from experts, because the population never backed the integration process. He said the British were benefiting from the EU in terms of improved welfare, but the population did not understand this, and only saw the lost jobs, immigrants and the lack of social services.

He said the East African Community needs to be people-centred, business-led in its integration efforts. Most EAC decision are currently driven by the leadership and the people may not understand the benefits.

Exit consequences

According to Betty Maina, Principal Secretary at Kenya’s Ministry of the EAC, the direct impact will be felt by the EAC later after the terms of exit are known. It will take about two years for the UK to notify the EU Secretariat and more time for it to fully exit.

The consequences will be hard felt in the EAC economy because the EU is the largest trading partner for the region. This will make it hard to conduct business separately with the UK and the other EU countries.

“For the EAC this is a pointer that integration alone is not binding and therefore EAC countries, as they negotiate, should consider the other partner states’ powers and not let the Secretariat make decisions without proper agreements,” said Ms Maina.

“However past decisions between the EAC and EU are binding until they fully exit. EPA negotiations will thus not be affected until the UK exits the EU,” she added.

Masinde Wanyama, an EAC integration expert and director of Africa Capacity in Nairobi said the UK’s decision would affect already negotiated trade agreements between the EAC and EU like the EPAs, especially on the quotas.

“The EAC will have to renegotiate the agreement separately with the UK and the remaining EU countries. But, this will depend on whether the UK decides to leave or remain in the Single Market,” said Dr Masinde, adding, “If it remains in the Single Market, then it will not affect the trade agreements that the EAC already has with the EU.”

Senior economist and economic lecturer from the University of Dar es Salaam Dr Haji Semboja told The EastAfrican that the UK’s withdrawal from the EU would, to a greater extent, benefit African countries through economic development projects.

He said the EU members had already sensed the Brexit and prepared themselves to face challenges after UK’s withdrawal.

“British companies once benefiting from other EU members will be forced to look for other market sources outside the EU boundaries, including the growing African economies”, he told The EastAfrican.

“I see more business competition between British companies and those in the remaining EU members, a situation that will help African or small economies to benefit from those giants”, he said.

READ: From beer to drugs to cars: Global business laments EU vote

ALSO READ: Anatomy of Brexit: A divided kingdom

More than 17 million people voted in the referendum on Thursday to sever ties with the European Union, and about 15.9 million to remain within the bloc, in a decision that has stunned the world.

British PM resigns

Following the vote, UK Prime Minister David Cameron, who had campaigned for Britain to remain in the EU, announced that he would resign ahead of the Conservative Party’s conference in October.

READ: British premier David Cameron quits following vote to leave EU

Trade experts and economists in the region say Britain’s decision to exit the 28-member EU would distort existing trade pacts and call for fresh agreements.

Peter Kiguta, EAC director for Trade and Customs, said the bloc would be negatively affected: “Currently we trade with Britain under the EU trade regime which will not apply once Britain formally quits the EU. Our preferential market access, unless preserved, will expire and our goods will attract duties while entering Britain. This will hit our exports of flowers and vegetables mainly.”

“The economies of EAC especially Kenya, Uganda and Tanzania are also heavily interlinked with that of UK. The UK is a leading importer of EAC exports and source of imports. If the pound sterling depreciates, that shall be good for importers but bad for our exporters as they will earn less in terms of local currency,” said Mr Kiguta.

Manufacturers said the vote created uncertainty over access to key markets.

“This opens up a period of uncertainty with regard to market access between the UK and the EU, as well as their relationships with other countries, including the EAC,” said Phyllis Wakiaga, chief executive, of the Kenya Association of Manufacturers.

SEE VIDEO: Potential impact of Brexit

She hoped the change would not create challenges for exporters as both the UK and EU were key trade and investment partners for the region.

Export market

Stakeholders in Kenya’s horticulture sector are worried about the new trade pacts with the UK outside the EU bloc and the change in currency pricing between the euro and the pound sterling.

“This is definitely a worry for us because it now takes us back to the negotiations with Britain as a country outside of the European Union bloc. The other concern for Kenya’s flower business is the change in currency pricing. We will now adopt the pound as opposed to the euro,” said Jane Ngige, chief executive of Kenya Flower Council.

“We have also seen the immediate currency fluctuations, which will definitely affect our exports in the coming weeks,” she said.