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Despite thorough warnings of its devastating implications, a staggering 51.9% of Britons made history by voting to leave the European Union this past week. The ripples of its effect have been felt all over the world, including Africa, with economists and financial leaders looking hard but not finding much that can be deemed a positive outcome from this political move.
The interconnectedness of our global markets has put us all in a position where when one nation decides their own fate, that ours is determined with it.
The question now is how the Brexit will affect South Africa:
Although South Africa might still enjoy favourable access to the EU market through the EU-SADC Economic Partnership Agreement, it could still be harmed by renegotiated trade agreements between the UK and its EU counterparts.
Trade will also be severely disrupted as renegotiations between the UK and EU countries could take years, which may also have a knock on effect on SA trade. This disruption could cause a steep decline in both the EU and UK economies, making our economy less affordable to them, thus negatively affecting our export market.
The UK is an integral source of foreign investment in South Africa, with some sectors like our healthy startup culture relying heavily upon it for investment capital. The Brexit will slow down most external trade from the UK, including in emerging markets like ours, leading to far less active foreign investment within our market.
The Brexit brought with it the collapse of the pound, bringing it to the lowest it has ever been since 1985. With the South African economy being no stranger to the roller coaster of its own currency volatility, and with threats of junk status still echoing within earshot, another threat of rand value decline could not be less welcome.
The uncertainty of the post-Brexit world will have an impact on SA; the “Leave” vote may strengthen the euro and the dollar but weaken the pound and the rand. This will lead to a higher inflation rate, weaker growth and higher interest rates. Unfortunately for us this also means an increase in the petrol price, which proportionally affects the price of food which is mostly transported by road.
One of the long term negative effects will be a slow-down on economy growth in SA, which will undermine our credit rating – a huge concern for us currently. However the actual impact of the Brexit on SA will only be revealed in time, as there are so many factors at play that could cause a domino effect, which is extremely difficult to predict. For now, South African businesses have fastened their seat belts in anticipation of the rest of this Brexit ride.
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