By Peter OBIORA InvestAdvocate
Lagos (INVESTADVOCATE) – The United Kingdom (UK) vote to exit Europe would likely worsen Nigeria’s economic situation, according to the latest report from specialist intelligence company focusing on forecast on African and economic risk, EXX Africa.
The report analyses the impact of an eventual ‘Brexit’ on three (3) of the UK’s most important African markets which include South Africa, Nigeria, and Kenya.
On the Nigerian case study, EXX Africa says Nigeria’s effective implementation of a new foreign exchange mechanism and liberalisation of the fuel sector will face fresh hurdles as the UK withdraws from the EU. “Nigeria will also struggle to attract interest in new debt sales aimed at financing its expansive budget,” the report affirmed.
According to EXX Africa, the main impact of a ‘Brexit’ on Nigeria would be further deterioration of the country’s already struggling economy, which has been caused by the fall in global oil prices and a steep drop in local crude production due to an insurgency in the Niger Delta.
It noted that there is extensive trade and security cooperation between the UK and Nigeria that would be likely to face several years of disruption as the UK departs from the EU. “Nigeria is the UK’s second-largest export market in Africa. Bilateral trade between the two (2) countries is currently worth $8.3 billion and projected to reach $25 billion by 2020,” EXX Africa added.
Also, the report said UK is Nigeria’s largest source of foreign investment, with assets worth over $1.4 billion. “Moreover, UK-Nigerian remittances account for $21 billion a year. The UK is also one of the largest development assistance donors to Nigeria, although Nigeria is not as aid-dependent as most continental counterparts,” it noted.
It further affirmed that a slowing UK economy on the back of a departure from the European Union (EU) and potential disruption as the UK renegotiates its trade agreements, would be likely to reduce trade flows, foreign direct investment, and Nigerian remittances.
EXX Africa says that there is also no guarantee that other EU countries will make up the UK shortfall in trade and investment, as other EU countries look to Iran for more reliable access to oil and to Asia for cheaper labour.
According to the report, on 24 June, Nigerian stocks ended a three-day rally, falling 1.4 percent over worries of Britain’s vote to leave the EU. Nigerian banks, such as Fidelity Bank and Zenith Bank, recorded the biggest losses. Nigerian stocks had previously rallied 8.5 percent after the government floated the naira and ended a highly controversial currency peg.
EXX Africa noted as a result, new portfolio inflows will slow, which will hamper the implementation of the country’s new foreign exchange mechanism.
Also, on 20 June, the Central Bank of Nigeria (CBN) introduced a more flexible foreign currency policy, removing a de facto peg of around 197 naira to the US dollar. The naira’s 16-month peg to the dollar had overvalued the Nigerian currency, resulted in an economic contraction, and harmed investments.
It said the implementation of the fuel sector liberalisation, including the termination of a burdensome state-subsidy scheme, would be likely to face implementation issues. “The sector’s liberalisation will add to fuel importers’ margins and will allow shipments of fuel to resume. The liberalisation of the fuel marketing sector and the proposed introduction of a flexible exchange rate are both aimed at soothing foreign investor concerns and to attract new fundraising to finance a record budget deficit widened by a fall in oil revenues,” the report added.
On the positive side, the report noted that the effective implementation of the new currency regime and establishing its credibility will be key to attracting new foreign direct investment and portfolio flows.
Also, Kemi Adeosun, Nigeria’s finance minister would launch a planned eurobond sale later in the year. And the Nigerian authorities plan to raise $10 billion of new debt of which $5 billion would come from foreign investors. “Much of this planning would be delayed as risk averse investors steer away from Nigerian debt,” EXX Africa said.
For South Africa, the report said the nation’s economy is now more likely to fall back into recession and extreme currency volatility indicates that a downgrade of its credit rating to non-investment grade in December is now almost inevitable. “Bi-lateral security cooperation and aid programmes face less disruption,” it affirmed.
On Kenya, the report noted that the country’s markets were relatively stable following the ‘Brexit’ vote, “although any disruption in EU trade negotiations would negatively impact the cut flowers export market. It is likely that the UK would prioritise trade negotiations with Kenya, which could even benefit Kenya and other EAC members,” EXX Africa said.
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