What Brexit means for South Africa

Emerging markets like South Africa run the risk of becoming less attractive investment destinations following the UK’s decision to exit the ...

Emerging markets like South Africa run the risk of becoming less attractive investment destinations following the UK’s decision to exit the European Union (EU)

As the world comes to grips with the shock decision that most didn’t see coming, local economists are starting to take stock of what the implications could be for the country and the picture isn’t pretty.

On Friday, the rand became the first casualty, plummeting even further than it did after the finance ministry reshuffle debacle that was Nenegate.

Ian Cruickshanks, chief economist at The SA Institute of Race Relations (SAIRR), says one of the biggest risks the decision poses for the country is that economic activity in the UK will likely decline. This is because without the preferential trade agreements enjoyed under the EU, British exports will ultimately be more expensive.

“It was unexpected and what financial markets dislike more than anything else is uncertainty. What this is likely to do then is to say there may be less willingness to invest in propositions where the results are uncertain like emerging markets like we are or commodity- economies which we are because one is uncertain of the future price of those commodities. If overall economic activity will be declining then it’s not seen as a strong growth area and [investors] may begin to question whether they want to bring their money here,” Cruickshanks says.

The move, which couldn’t come at a worse time for South Africa with its stagnated economy and the potential of slipping into a recession looming large, could also mean that government access to international loans and access to capital in the UK – which is SA’s seventh-biggest import and export market – may be harder and more expensive to attain.

“I think what we have to look at is if it means there’s less investment, here then it means there will be less new business, fewer new jobs, and a risk of even higher unemployment,” says Cruickshanks.

“What that means is that then there’s a greater demand for government to provide more social grants and then where is the money going to come from to build new roads and railways and other infrastructure development?”

The weaker rand is likely to impact inflation and the higher the inflation rate, the higher the overall cost of living becomes for the average South African.

It also has the potential to put the SA Reserve Bank under further pressure to curb rising inflation by increasing interest rates even further, which is bad news for consumers whose budgets are already stretched.

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