As Thursday, June 23, 2016 is gradually confined to the history books, the day would be globally remembered as one on which voters in Great Britain defied several cautions from key stakeholders notably: Prime Minister; David Cameron, the Bank of England and the US Federal Reserves.
It would be recalled that a week to the Brexit (Britain’s exit from the European Union) referendum, the US Fed decided to leave its key monetary policy rate unchanged, citing elevated external risks from a potential Brexit decision. The Bank of England emphasized the Fed’s views by equally deciding against monetary tightening, warning that a Brexit decision would trigger a nosedive in the Pound’s value with increased risk of economic recession in the UK.
But Alas! The “Leave” seekers triumphed with a 52% vote in favor of a British exit from the EU compared to 48% votes for Britain to remain in the Union. At this early stage, UK’s decision to exit the EU appears more inward-looking in the view of many observers and analysts rather than a holistic view of the changing global economic strength. As it stands, the only certainty from the Brexit decision is the uncertainty it creates both in the short term as well as the medium to long term outlook.
Currency and Commodity Markets React:
Ripples of the Brexit decision was immediately felt across both the currency and commodity markets as speculation thrived on the back of the uncertain future ahead for the British (in particular) and the global economic recovery.
The highly liquid nature of financial markets ensured that global stocks and currency markets recorded sharp volatility in the immediate aftermath of the Brexit confirmation with the British Pound expectedly taking a huge knock. The intensity of speculative drives in the global financial market immediately knocked the Pound to its lowest level since 1985 as portfolio investors cut exposures in Pound-denominated assets in favour of safe-haven asset such as gold, the US dollar and the Japanese Yen. The contagion effect of the Brexit decision generated a knock-on effect to the Euro as the future of the 19-member euro area came under scrutiny by investors.
The impact on the Ghana cedi was however mixed, reflecting Ghana’s low integration into the global financial system and the uncertain future ahead. The Ghana cedi immediately surged by 8.7% and 2.1% against the British Pound and Euro respectively but with only a marginal decline of 0.02% against the US dollar. The cedi’s relative stability against the US dollar however reflected the government of Ghana’s decision to exploit the heightened uncertainty in the advanced markets (due to the Brexit decision) through the issue of a 5-year domestic bond (marketed to offshore investors).
The 5-year bond issue (in the same week) resulted in a total uptake of GH?811.04 million at 24.5% with offshore participation accounting for 61% of the total allotted amount. The increased offshore inflow to take position in the cedi-denominated bond consequently supported the cedi against the US dollar, minimizing the depreciation pressure from the globally strengthening US dollar. The mixed performance of the Ghana cedi against the three major international currencies emphasizes the uncertain outlook the Brexit decision poses for the cedi’s stability against the US dollar as capital flight continues on the global scene.
Gold glittered on the global commodities market as funds were moved into safe-haven assets (including the precious metal), fueling a price surge above $1,300/oz. within the first 24 hours of the Brexit decision. Energy and agricultural commodity prices however suffered sharp losses as concerns over global economic recovery were triggered with market expectations of renewed weakness in global demand. Yet again, the mixed performance of commodity prices on the global exchanges reflected the heightened uncertainty from the Brexit even in the short term.
The impact on primary commodity exporters such as Ghana (and other Sub-Saharan African countries) would equally be a mixed one as gains for Gold price could be offset by losses for crude oil and cocoa with uncertain outcome for the fiscal and balance of payments position. The balance of payments effect of the commodity and export markets volatility could amplify the risks to the cedi’s stability against the US dollar in the short term.
The Domino Effect:
There is no doubt that Britain’s exit from the European Union could undermine the sustainability of the EU, the Eurozone and even the UK as a united front in international treaties. Following the final result of Britain’s referendum, it turned out that Scotland, Northern Ireland and the City of London all voted to remain in the European Union. This has triggered speculations of a threat to the UK’s post-EU stability, an outcome that would further dilute the attractiveness of Britain as a global financial hub. The EU’s continued existence has equally come under the microscope as up to five (5) other EU-members (France, the Netherlands, Austria, Finland, and Hungary) are reportedly considering an exit referendum in the future. Ultimately, the Brexit appears to have opened the “Pandora’s box” with the domino effect potentially undermining EU and Euro area stability.
The Long Term Outlook: Uncertainty about Trade and Aid Flows
While the UK negotiates its withdrawal terms from the EU, international trade, aid and immigration activities would remain consistent with agreed terms and conditions under the European Union pending Britain’s official exit. This however highlights the uncertainty associated with the medium to long term outlook as the UK’s potential path after EU remains unclear at the moment. Ratings agency, Moody’s, has responded by lowering the UK’s credit outlook to “negative” (from stable) due to anticipated “prolonged period of uncertainty”. Moody’s expects the referendum result to impose negative implications for the UK’s medium term growth outlook, one that would outweigh any fiscal savings from withdrawal of Britain’s contribution to the EU’s budget.
The UK market currently account for ~2.9% of Ghana’s total export revenue (as at Q1-2016), pointing to a potentially minimal negative trade effect of the Brexit on Ghana’s export revenue. The UK’s ultimate exit could trigger a new set of trade agreements between Ghana and the UK, an outcome that could swing the trade dynamics against or in favour of Ghana (from the current 2.9% level). However, the European market as a bloc account for about 36% of Ghana’s export revenue, indicating that the domino effect of the Brexit could hurt Ghana’s trade flow to Europe. The Netherlands (5.8%) and France (3.5%) represent the top two destinations for Ghana’s export to the Europe. But with these key markets potentially driving the domino effect across Europe, there remains elevated uncertainty in Ghana’s major export market.
Donor inflow from the UK (and the EU) was already expect to decline over time (with or without the European market turmoil) as Ghana consolidates its middle income status. The current level of political and socio-economic uncertainty could however hasten the pace of decline as a potential slowdown in Europe’s economic activity and revenue generation would inevitably reduce the bloc’s ability to sustain development assistance. While the UK may not consciously review its support program for countries such as Ghana, the perceived inward-looking posture of the Brexit decision raises doubt about reliability of the aid flow to Ghana and Africa over the medium to long term.
As Britain exits the European Union, a world of expectations and uncertain future awaits the Kingdom and its international partners including Ghana. In the midst of the heightened uncertainty, Ghana and Africa could do well to explore regional markets together with diversification away from the largely “mono-commodity” economic structure. But one thing is clear: uncertainty is the only certainty from the Brexit.
Authors: Courage Kingsley Martey (Economic Analyst: [email protected]), Kweku Temeng (Head of Business, EIB Network)
