BREXIT: Of trade, economic growth and Botswana

Mothusi Tshekiso - BG analyst
Monday, 04 July 2016
BREXIT: Of trade, economic growth and Botswana

The BREXIT paradox is now upon sub-Saharan Africa. That is, as it turns out, what is politically the right move for the UK may turn out to be economic suicide. Or what may be the economic move for prosperity may turn out to be a diplomatic nightmare.

Already, fears of increased market volatility are apparent as evidenced by the pound sterling depreciation by amazing percentage points. As at the 24th June, the morning of the ground breaking outcome of the vote, the pound sterling was down 12percent on the USD and against the Euro it was down 9percent . This surely will result in a major shift in the trade decisions by prospective and incumbent investors in the days that will follow.

In this position note, we analyse the possible outcomes as a result of the referendum. The list is far from exhaustive as there are multiple diverging and sometimes parallel outcomes that can come as a result. But one thing remains absolutely certain: it will be a long, physically, politically and economically draining process for the pull-out to be finalised. The vote is just a stepping stone: what lies ahead for the UK, especially after David Cameron courageously threw in the towel, will be a long hard road.
Volume of trade

About half of the UK trade is with the EU. It leaves more questions than answers when a situation of this magnitude has taken this course. Trade statistics suggest that the three months ending April 2016 saw an increase in the deficit on trade in goods by 0.6billion. That is, imports increased by 2.7billion and exports by 2.1 billion bringing this to a record 24billion deficit in the three months. This is an indication of the confidence with which the business community has been endowed as a result of the BREXIT.

As at the G8 summit in Gleneagles, Scotland it was unanimously agreed that aid to Africa will be doubled and outstanding debts to some of the poorest countries will be eliminated. It was agreed that aid will be increased by at least 50 million with poor countries in Africa getting the lion’s share of the deal as half was to go towards Africa. HIV and AIDS, education and other public goods being a priority were to have increased investment from the UK. Now, the African child can only wonder. With the trade deficit widening, power shifting in the EU and economic might of the UK diminished, will this become a reality. But then again, there is very little to no influence on opening external trade for the UK by the EU. Therefore, some experts believe that a BREXIT will have no effect on the volume of trade by the UK.

On so many levels, a lot hinges on the type of cooperation that the UK will follow after this. The most likely for the sake of trade will be the Norwegian style EEA agreement in which “the UK joins the European Economic Area and maintains full access to the single market, but must adopt EU standards and regulations with little influence over these. The UK still makes a substantial contribution to the EU budget and is unable to impose immigration restrictions.”
trade costs

Indications are that trade with the UK and the EU will be a spectacle for economic spectators and pirates. If there was ever a “right time” to buy the pound, it must be after the shift in its weight following the BREXIT. It is evident that the deficit will widen further as UK goods, will become cheaper for the UK and expensive for the UK trade with the EU. This again will have considerably unfavourable effects on capital structures. There is bound to be some form of capital flight as investors will receive a blow on their wealth as the pound sterling plunges.

lower net contribution to the EU budget would reduce prises for Botswana
The European development fund (EDF), which is now doing its 11th leg (2014-2020), was budgeted at a staggering 30.32 billion euros which represented an increase from the 10th leg by 13percent . Now, this is essentially 30percent  development aid of the EU. For those with mouths drooling at the time, sooner or later the reality is that what was promised may not be delivered. The UK contributes about 14percent of the EDF and just by rough calculation, this means a drop in the fund by 4.2billion euros, which far outweighs the increase that was achieved at 3.39 billion euros. This implies some change in what the poorest African countries were bound to receive. This again depends on the model of cooperation that will be adopted post the BREXIT.

Fall in incomes-Reduced trade will have dampening effects on productivity, resulting in reduced incomes and ultimately hurting economic growth. Immigrants have played a major role in the growth of the UK economy but now, the future is uncertain. With the use of the Solow growth model that is hinged on endogenous growth it has been proved on different studies that human capital spill-overs have a positive impact on regional productivity and growth. And, FDI as associated with positive technology and human capital spill-over from one country to the other. Therefore, in this regard, it will be reduced.

Some experts though are of a different view. Immigration problems and loopholes have been a thorn on the UK. An increased diminishing of employment prospects for a Briton was a concern because of immigrants. For the tax payer, it brought negative effects as the public good definitely has to be financed in order for immigrants to enjoy equal social amenities. That meant a decrease in disposable incomes and welfare for a Briton. But now, with the BREXIT, all these may be reversed. This means the EU has little to no influence on immigration policies for the UK hence they will most likely tighten the grip on their borders. This will result in a low subsidy by a BRITON on the public good hence increasing disposable incomes.

reduction in bargaining power
Now that the UK populace has voted out of the EU, bargaining power on the European front has been reduced. Though bilateral relations between Africa and UK will be strengthened, bilateral trade will be diminished largely due to reduced bargaining power. The process for the UK to re-negotiate relations will be a lengthy and economically taxing process. For African exports to the EU, this will have rough effects on their performance. Botswana’s beef exports to the EU are now facing an uncertain future. The renegotiation of prices and entry into the wider continental market of the EU leaves the spectator confused.

On the one hand, the BMC, which has been struggling, will not be impressed by the outcome of the vote because of the cost of uncertainty. On the other hand, this may open a few doors which were closed by the inclusion of the UK in the EU. That is, the foot and mouth red tape that has been a thorn on the BMC beef export may be relaxed as bilateral relations improve. The EU market’s importance on the UK cannot be understated. What is evident though is that given its importance to the UK, and if Norway is anything to go by, they will be forced into the same single market rules. Sadly, being outside the EU will hurt the UK influence and hence a reduction in bargaining power.

In conclusion, most of the effects of a BREXIT are now more speculative than definite. There is a need for quantitative trade models to be used to forecast the potential damage or benefit to economic growth for Botswana and Africa as a whole.

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