THIS region tends to be affected by global events via the
financial and trade channels. In brief, of the bigger SSA
economies, Kenya is one of the countries most exposed to
a Brexit (relatively), via the tourism, trade and financial
channels.
Fall in demand for SSA
exports, on the back of a
slower UK economy –
There are fears that a Brexit
could lead to a growth
slowdown in Britain. A
slower British economy will
hurt the SSA countries that
have strong trade linkages
with it.
And the reality is that only a couple of SSA countries have what one would call strong trade linkages with the UK, as most have turned East over the past two decades. The UK is an important export destination for the small island nations of Seychelles and Mauritius. The share of their exports that end up in the UK are in the double-digits. On a relative basis, Kenya is the third most exposed country in our SSA universe. However, in actual percentages, only 6% of its exports end up in the UK, according to IMF data.
The rest of the East Africa Community is Kenya’s biggest export destination. That said, Europe is Kenya’s biggest source of tourists, and I think the British dominate that number. And tourism revenue is still one of Kenya’s top three sources of FX. Less than 4% of Nigeria’s exports end up in the UK.
Investor confidence
Capital inflows may slow- investor confidence has been severely undermined by the uncertainty created by Britain’s vote to leave the EU. This may result in a slowdown in capital flowing into frontier markets, as investors hide in safe haven assets.
Increased risk aversion may temper the appetite for SSA Eurobond issuances planned for second half of 2016.
Nigeria, in particular was unfortunately hit yesterday by a double whammy – a credit rating downgrade by Fitch (to B +, from BB-), which will make it more expensive for Nigeria to borrow externally when it issues its planned Eurobond, and Brexit, which may temper appetite for Nigerian assets.
A further slowdown of capital inflows into SSA will result in a further deterioration of external balances that are already reeling from depressed commodity prices.
Currencies will come under pressure – the most tradable currencies will depreciate the most (like the ZAR has done), on the back of news that Britain voted to exit the EU. SSA currencies, less so, because their currencies are more managed. Kenya’s central bank has pledged ‘to intervene in the money and FX market to ensure their smooth operation’. For Nigeria, we think this means investors that were encouraged by the liberalisation of the country’s FX regime and were considering dipping their toes into the country may now pause given the rise in global risk aversion, following the Brexit vote. This further delays a recovery in Nigeria’s capital inflows, which is negative for the naira.
Fed rate hikes may be pushed out – this would offer a reprieve for SSA currencies.
Trade agreements revisited – Britain may have to broker new trade agreements which may have some implications for SSA.
Fall in demand for SSA
exports, on the back of a
slower UK economy –
There are fears that a Brexit
could lead to a growth
slowdown in Britain. A
slower British economy will
hurt the SSA countries that
have strong trade linkages
with it.And the reality is that only a couple of SSA countries have what one would call strong trade linkages with the UK, as most have turned East over the past two decades. The UK is an important export destination for the small island nations of Seychelles and Mauritius. The share of their exports that end up in the UK are in the double-digits. On a relative basis, Kenya is the third most exposed country in our SSA universe. However, in actual percentages, only 6% of its exports end up in the UK, according to IMF data.
The rest of the East Africa Community is Kenya’s biggest export destination. That said, Europe is Kenya’s biggest source of tourists, and I think the British dominate that number. And tourism revenue is still one of Kenya’s top three sources of FX. Less than 4% of Nigeria’s exports end up in the UK.
Investor confidence
Capital inflows may slow- investor confidence has been severely undermined by the uncertainty created by Britain’s vote to leave the EU. This may result in a slowdown in capital flowing into frontier markets, as investors hide in safe haven assets.
Increased risk aversion may temper the appetite for SSA Eurobond issuances planned for second half of 2016.
Nigeria, in particular was unfortunately hit yesterday by a double whammy – a credit rating downgrade by Fitch (to B +, from BB-), which will make it more expensive for Nigeria to borrow externally when it issues its planned Eurobond, and Brexit, which may temper appetite for Nigerian assets.
A further slowdown of capital inflows into SSA will result in a further deterioration of external balances that are already reeling from depressed commodity prices.
Currencies will come under pressure – the most tradable currencies will depreciate the most (like the ZAR has done), on the back of news that Britain voted to exit the EU. SSA currencies, less so, because their currencies are more managed. Kenya’s central bank has pledged ‘to intervene in the money and FX market to ensure their smooth operation’. For Nigeria, we think this means investors that were encouraged by the liberalisation of the country’s FX regime and were considering dipping their toes into the country may now pause given the rise in global risk aversion, following the Brexit vote. This further delays a recovery in Nigeria’s capital inflows, which is negative for the naira.
Fed rate hikes may be pushed out – this would offer a reprieve for SSA currencies.
Trade agreements revisited – Britain may have to broker new trade agreements which may have some implications for SSA.
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