Brexit victory kills the Pound

SHARE   |   Monday, 27 June 2016   |   By Kabeko Adamson
Brexit victory kills the Pound

The Thursday European Union (EU) referendum results in which the place of Britain in the bloc was to be determined has drove the Pound to its lowest in 30 years after the British voted to leave the Union. On Friday afternoon, the Pound had fallen as much as 11 percent to $1.3229, according to Bloomberg News, with the decline described as the worst since 1985, after the majority voted for the United Kingdom (UK) to leave the 28 member states coalition.

PM steps down
The referendum results, which have forced Britain Prime Minister to step down, have also led to other currencies plunging with the South Africa Rand (ZAR) dropping more than four percent against the dollar. According to media reports, the vote out caught many off-guard with many investors destined to lose a lot of money. “It’s scary; I have never seen anything like that, a lot of people were caught out, and many investors will lose a lot of money,” Bloomberg quoted head of research and investments at ETF Securities in London, James Butterfill. Moatlhodi Sebabole, Research Manager at FNB Botswana said on Friday that the Britain’s walkaway will in the short term result in destabilisation of the UK and EU markets on capital markets (equities, bonds, and alternatives), currencies, interest rates and cost of capital and trade prospects.

Botswana beef exports in trouble
“Any normalisation will depend on policy reactions and interventions, as well as timing of those reforms,” Sebabole said. Botswana’s primary export to EU is beef and has an access to the European market through an economic partnership agreement (EPA) which facilitates free flow of trades and with the UK leaving. Sebabole said there will have to be trade negotiations on terms of trade with UK market for exports and that might take some time as the country undergoes structural reforms, adding that this might limit access to UK market in the interim and thus negatively affect beef exports receipt in the short-term. A Research Analyst at Motswedi Securities, Garry Juma, said the exit has brought a moment of uncertainty on the global markets. After the signing of the SADC-EU Economic Partnership Agreement (EPA) in Kasane two weeks ago which is meant to drive economic growth and diversification in the six SADC member states, Juma said an agreement will now need to be struck with the UK separately as it is a market Botswana cannot afford to miss. He said the plunge by the Pound might not have a significant impact on Botswana diamonds and beef which forms part of Botswana’s main exports to the region.

Vote: 51.9% leave

The withdrawal by Britain termed “Brexit” from the economic and political partnership bloc came about after 51.9 percent voted for “leave” against 48.1 percent who preferred the UK to remain in the 28 nation alliance which will now be reduced to 27 members. Sebabole said: “The Brexit also causes uncertainty on the EU as some other members might consider an exit from the union which might complicate trade with Europe and thus slow down trade prospects for Botswana.” The FNBB economist said it is worth noting that the extent and continuity of spillover effects of the Brexit to Botswana and other markets will be dependent on how the Bank of England and UK government react to economic disruptions in the UK. Though the exit has brought a cloud of uncertainty on the global economic landscape particularly in emerging markets, Sebabole feels the Foreign Direct Investments (FDIs) inflows from the UK and the rest of Europe may be minimal to Botswana. “Given the size of Botswana’s capital markets in both the sovereign and private sector listings, it is unlikely that capital FDI’s inflows from UK and Europe will find its way to Botswana and thus our capital markets are not expected to have causality effect from the UK stock markets.”

Pula pegged to Pound
With the Pula denomination pegged to the Pound in the 50 percent weighting of the Special Drawing Rights (SDR), Sebabole said inherent Pound weaknesses, and consequent USD strength means Pula will weaken further against the USD which will affect balance of payments in two folds – servicing USD debt repayments will be expensive; receipts for diamond receipts will be higher in USD terms given a stronger USD, the extent of which will depend on affordability for non-USD markets like Asia whose demand for diamonds has been increasing.

Capital flight
According to Sebabole, indirectly, uncertainty of UK outlook post a Brexit could result in further capital outflows from UK and Europe, with primary destination being the US, a dollar market which is likely to result in further strengthening of the USD – which is a negative for commodities market. “This means further USD strengthening will result in further stresses on the commodity prices. In terms of Botswana minerals, nickel and copper prices might fall further and put further strains on mineral revenue and a fiscal budget that already envisages a cumulative deficit,” he explained.