/ 24 June 2016

So Brexit is official, what now for South Africa and the rest of the world?

Supporters of the Stronger In Campaign react as results of the EU referendum are announced at the Royal Festival Hall
Supporters of the Stronger In Campaign react as results of the EU referendum are announced at the Royal Festival Hall

South Africans woke up with a cold shock on Friday as the United Kingdom’s referendum, on whether to leave the European Union, was narrowly won by the “brexit” campaign.

The decision by UK voters has thrown global markets into turmoil, with the pound crashing to levels not seen since the 1980s, and prompting British Prime Minister David Cameron to announce his resignation.

The rand, along with numerous emerging market currencies, has been collateral damage in the rout.

As the world begins digesting the ramifications of the vote, already questions are being asked about the likely effects this will have on the continued coherence of the EU as a political and economic bloc. 

With Cameron’s exit, much more political upheaval is expected in Britain. 

Its future as a “united kingdom” is also being questioned as economists and analysts believe regions like Scotland and Northern Ireland – both of which voted to stay in the EU – may now seek to leave the UK. 

Ahead of the vote experts warned that should Brexit become a reality, the fear that would inevitably spread through global financial markets would be the immediate “spillover mechanism” into South Africa’s economy. 

Thanks to South Africa’s wide current account deficit – which is in the region of 5% of gross domestic product – it is very reliant on foreign capital inflows to finance this shortfall. 

These capital flows are closely linked to foreign investor sentiment, and as investors flee emerging markets to safe havens such as the US dollar and gold bullion, this places pressure on the rand. 

But although the rand had weakened on Friday morning it was not beyond levels seen in the past month said Izak Odendaal, an investment analyst at Old Mutual Wealth. 

In recent days, markets had begun anticipating that the “remain” vote would win and there had been a rally.

“A big part of the reaction we are seeing now is the market giving up the gains that we had seen over the last couple of days,” said Odendaal. 

After opening at R14.41 to the dollar, the rand was trading in the region of  R14.98 by mid-morning according to Bloomberg.

But should rand weakness continue on a sustained basis, it was likely to put upward pressure on inflation and increase the likelihood of interest rate hikes he said. 

Aside from the impact this will have on the UK economy, the Brexit win has raised a red-flag over the future of the European Union itself. The EU is South Africa’s largest trading partner with South African exports to the EU reaching R216-billion in 2015 according to figures from the department of trade and industry. 

New political direction
The United Kingdom’s choice to leave the UK will intensify a rising tide of populist politics within the EU itself argued Odendaal. 

The union has seen a notable rise in the influence of so-called “Eurosceptic” political parties, often from the extreme left or right of the political spectrum, in the face of lower economic growth and rising inequality. Migration and a growing refugee crisis from regions such as Syria have compounded unhappiness. 

Right wing parties in France and Holland have reportedly already come out applauding the Brexit vote and vowing to seek similar referendums in their own countries, the Guardian reported

 “This is a moment for introspection,” Odendaal said, adding that Europe could face the test to either disband or push for greater integration

The impacts of a Brexit could lead to reforms within the EU aimed at bringing countries and the region’s economies closer together he said.

These include reforms to create a banking union aimed at better supervising commercial banks, and ultimately a fiscal union, that would see the creation of a central budget.

But for many Europeans on the ground, who since the financial crisis have lived through around eight years of dismal economic growth, a more unified Europe may not be their preferred option. 

Populist politics, once a staple of emerging markets, is now firmly entrenched in Europe and “that is a consequence of slow economic growth and rising inequality” argued Odendaal. 

The Brexit had serious ramifications for the EU as well as the future of the United Kingdom itself said professor Jannie Rossouw, head of the school of school of economic & business sciences at Wits University. 

But he noted that an exit by any European country that uses the euro as their currency, may be far harder than Britain’s exit, since it had retained its currency – the pound. 

The single task of returning to an independent currency – including designing and printing bank notes – would take as a long as two years according to Rossouw. 

Further splits?
Whether the United Kingdom would survive in its current form was another factor to consider said Rossouw, particularly what the future of regions like Scotland and Northern Ireland would be. 

Scotland voted by 62% to remain and already questions are being asked about the possibility that it will hold a further referendum to abandon its ties to the UK.  

This comes after a 2014 vote by the Scots over whether they should declare independence from England. 

Leaders in Northern Ireland have now also reportedly made calls for holding their own poll regarding its place in Britain.

The key question now was the future of the EU, which is South Africa’s largest trading partner, said Nosibusiso Ngqondoyi, head of research at Novare, in a press statement. 

“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.