Brexit and what it Means to Us… South Africans
The most common point of contention on all Business websites and news channels seems to be the Brexit debate. Brexit refers to the June 23 referendum in Britain about their European Union membership. Should the referendum lead to Britain exiting the EU the impact of the decision will be felt by all citizens. Do we as South African have to worry?
Top global banks and other companies, such as Merril Lynch and J.P. Morgan, have stated that should Britain exit the EU they would be forced to downscale offices in Britain. British citizens that currently work and live in other EU countries may face threats such as losing their jobs due to inability to acquire working and residential permits. This leads to the issue that many citizens reside in other EU countries and could potentially face deportation due to visa requirements.
Another key impact is the cost of goods within Britain. Great Britain is a net importer of goods with a 2015 trade deficit of negative £ 10.4 billion. Of the top 10 trade partners 8 of these countries are part of the EU and 1 of the remaining countries, Norway, is closely related to the EU through their association and membership to the European Free Trade Association.
Should Britain exit the EU it is likely to see the cost of trade increase, as Britain will no longer benefit from the free trade agreements that exist between EU countries. The only comforting prospect for Britain is that it could apply for membership to the European Free Trade Association, similar to Norway. It is unclear how successful such an application would be considering many EU countries do not want Britain to leave the EU, and accordingly would likely vote against such an application.
It is possible to still write pages on the impact of a Brexit on Britain, which would however leave the question as to how it affects South Africa unanswered yet again. To answer this question it is necessary to look at the main points of interaction between South Africa and Britain namely:
- Tourism, and South African citizens residing and working in Britain; and
South Africa’s biggest single country trade partner is China, other mentionable trade partners include: Germany, Saudi Arabia, Japan, Botswana and Britain. It should be mentioned that the European Union, i.e. all the countries within the EU, trade more in value with South Africa than China.
As for trade with Britain, South Africa is currently Britain’s largest trade partner in Africa. Currently the trade relations between these two countries is governed by the rules and regulations as set out by the EU. As a result South Africa is not allowed to export certain products, under their more conventional names, to Britain. The most common examples include the alcoholic spirits Port wine and Champaign.
It is interesting to mention why this is not allowed. Port wine was originally and exclusively produced in Portugal, in the Douro Valley. South African producers also started producing a South African version of Port wine that was exported to the EU. Due to the quality and exceptional standard of South African Port wine, EU countries started preferring South African Port to their local counterpart. The EU trade delegation enacted a memorandum that prohibits South Africa from exporting to the EU any substance with the name Port wine. Similarly Champaign and other select items.
It is also interesting to note the South Africa – United Kingdom Bilateral Forum that currently exists between South Africa and Britain. The forum seeks to improve political- and economic ties between the countries. A major focus point of the forum is to improve trade. Should Britain exit the EU it is possible for South Africa to renegotiate trade agreements with Britain in a more favourable light and also export to Britain products that are currently prohibited for reasons not relevant to Britain, such as Port wine.
Tourism, work and residency
It is important to note that currently Britain and the EU do not share visa requirements and laws. Britain operates its visa programs separate from that of the EU, the two entities do not realise the visas of the other as a valid legal document. Visitors need to apply separately to Britain for visas should they wish to visit. Thus, a Brexit is unlikely to change this.
South Africa require British nationals to apply for a Visa when coming to South Africa.
Due to the separate Visa systems followed by Britain and the EU it is unlikely that Tourism between the two countries will be adversely affected by a British exit from the EU.
The main effect on the GBPZAR exchange rate of a Brexit is more an indirect impact than direct. Britain is facing a large capital outflow due to investors that want to pre-empt and exit of Britain from the EU. The outflow of capital is causing the pound to depreciate against both the Euro and the US Dollar. The capital outflow causes a general weakening of the Pound.
The threat of Brexit combined with the slight Dovish approach taken by the Bank of England, to not increase interest rates makes it unlikely that the Pound will suddenly strengthen.
Due to the general depreciation of the Pound the Rand is strengthening relative to the Pound. South Africa however faces our own problems. The most imminent and mentionable to the Rand is the Moody’s review of our credit rating.
The final effect of a Brexit on the GBPZAR exchange rate is not exactly determinable. I believe that the Brexit depreciation of the Pound currently offsets the risks posed to the Rand. The Rand will continue to appreciate relative to the Pound for the next Quarter.
In conclusion it seems unlikely that South Africa would be adversely affected by a British exit of the EU. It would allow for more in depth trading relations with Britain as well as a possible stronger Rand in the short term. Whether it is the correct decision for Britain only time will tell.