A week after the announcement of the result of Britain’s referendum on leaving the European Union (EU), what can we say about Brexit’s impact on Africa?
Strictly speaking ‘Brexit’ refers to Britain actually leaving the EU, which will not happen for some years at least, but in what follows the word is used to refer to the referendum result and the uncertainty it has provoked.
The immediate impact on Africa was largely contained to the continent’s most sophisticated market, South Africa, weighing on both the fragile rand and the Johannesburg Stock Exchange (JSE). Due to the depth of liquidity and range of financial market instruments, South Africa is viewed as a liquid risk proxy for the sub-Saharan African (SSA) region.
By contrast, external spillover effects to the rest of the continent were considerably more muted and largely contained to the more liquid sovereign credit and currency forward agreements.
Still, volatile global risk sentiment and systemic risk concerns brought forth anxieties with regard to the potential impact on Africa in the wake of the unprecedented Brexit vote.
In our view, the direct impact of Brexit on Africa will be contained to the forex and financial markets over the short term.This will primarily filter through to the real economy via the indirect impact of global risk sentiment on commodity prices, impacting the balance of payments and the monetary system, and implying that the upside risks to inflation have increased on account of exchange rate pass-through.
This pertains in particular to the case of South Africa, where we were already expecting continued monetary policy tightening.
Thin liquidity conditions and idiosyncratic risks limited the immediate impact of global market malaise on African financial assets, although we anticipate increased volatility in the spot and forward rates of commodity price-sensitive local units.
We view the currencies most at risk from external headwinds as theZambian kwacha, theAngolan kwanza, and theGhanaian cedi.
In turn, theCFA franc zone, under the two common monetary unions (the Central African Economic and Monetary Community, CEMAC, and the West African Economic and Monetary Union, WAEMU) is implicitly vulnerable to EU developments via the impact on the euro exchange rate. CEMAC and WAEMU peg their currencies to the euro at the same rate.
In recent sessions, the impact on theZambian kwachawas mitigated by cyclical factors as tax obligations brought about an increase in forex supply. In addition, the price of the red metal found reprieve as markets started to expect that US monetary policy will turn more dovish; this has weighed on the dollar index, and this has aided copper futures in recent sessions. Nonetheless, in our view the kwacha remains vulnerable to spillover effects from Brexit via the copper price, considering the red metal’s position as barometer of global risk sentiment due to its prevalence in industrial processes.
Heightened global risk aversion, via the risk-sensitive copper price, will weigh on the kwacha (in our view on forward rates more than the spot rate) during the latter half of the year.