At the time of writing, the rand was appreciating. Why? Because the latest opinion polls out of the UK pertaining to the vexed Brexit issue were more favourable to the “remain” side. This referendum is therefore of critical importance not only to the UK and Europe, but also to us here at the southern tip of Africa.
Currency issues seem to loom large in any discussion about the domestic economy. And a Brexit or ‘leave’ can flesh open a fresh wave of rand volatility detrimental to our already ailing economy.
Emerging markets are already under strain. The Brexit threat adds global uncertainty and a potential capital (and currency) flight to safer havens. While sterling may well devalue immediately after any Brexit vote, it is the US dollar that may strengthen, thereby affecting the ZAR.
South Africa simply cannot afford a further decline in the rand/dollar value. Coupled with the threats of rating agency downgrades towards the end of the year, a new era of currency volatility not related to our domestic political economy is clearly a danger.
To kickstart the flagging foreign direct investment needed to grow our economy, South Africa needs not only to be attractive to domestic political and economic policy, but also requires a broader ‘risk averse’ global investor climate.
Clearly, any Brexit-induced shock to the international financial system will do us no favours.
It is often said that a fair proportion of the value of our currency is reflective of international macro-economic and sentiment-driven trends. Indeed, a Brexit vote will not only create currency instability, but it can also precipitate a sense of unease within the existing European Union over a host of member countries and even national regions which are increasingly sceptical of the entire EU project. The EU certainly does not need to encourage a rising tide of nationalism that a Brexit vote may fuel.
A Brexit vote could lead to other national referenda and in an already emotionally charged atmosphere in Europe, with security, immigration and debt concerns looming large, a weakened or balkanised EU would further hamper any recovery in global trade – already pretty lacklustre. South Africa too would bear the brunt of this as the EU continues to be its major trading partner.
Trade remains at of the heart of the UK-SA relationship. Any Brexit vote would hamper levels of trade between UK-based companies and South Africa as a result of negative economic consequences on London. Our country would
also be harmed by the possible renegotiation of trade agreements between the UK and her EU counterparts.
If the preferential trade agreements which form the cornerstone of the EU are diminished as a result of any UK exit, this will surely have a knock-on effect here in South Africa. After all, South Africa remains the UK’s largest African trading partner and while it has slipped lower on our domestic radar screens in terms of export trade, the UK remains our seventh largest import and export market in global terms (2014 figures).
Although some have speculated on what this might mean in terms of a direct statistical effect on our GDP, it’s the unintended consequences of any Brexit that pose a greater risk to our domestic economy.
So it will be a tense week for both politicians and markets in both the developed and emerging economies. The ramifications of a domestic vote in the UK are global, emphasising the interconnectivity of the UK economy in a much more globalised world.
Making predictions are always risky, but given the high level of uncertainty as to what a Brexit might mean for a voter in Manchester or Edinburgh, it may just be that the voters opt for the old adage of ‘better the devil you know than the devil you don’t know’.
After all, the EU was always a risky experiment and leaving it would be just the same.
By Daniel Silke for Fin24