The impact of Brexit on South Africa and Africa
Countries in Africa are preparing for the reality that a hard Brexit could lead to increased risk aversion and reduced investor appetite for trade in the region. Akinwumi Adesina, president of the African Development Bank (AfDB), said recently that AfDB might revise its economic growth projections for Africa if global trade conditions worsened. The growth projections are currently 4% for 2019 and 4.1% in 2020. However, current world trade frictions are also providing many opportunities for the continent, as well as a chance for Africa to showcase its new African Continental Free Trade Agreement (AfCFTA), which now covers the world’s largest free trade area.
South Africa is a large recipient of British foreign direct investment (FDI) in Africa. In 2018, investors from the UK completed M&A transactions worth US$ 5.9 billion in South Africa. Further, the UK was the top acquirer country for mergers and acquisitions in Africa in the first half of 2019, with 30 M&A deals completed by UK based companies in Africa (according to analysis by Baker McKenzie of M&A data released by Refinitiv). Nine of these 30 African M&A deals by UK investors were in South Africa. South African outbound investment is also primarily focused on the UK. The ease of doing business with the UK and South Africa is brought about by various factors, including, similar time zones, language, historical ties and familiarity. However, due to its close investment and financial ties to the UK, South Africa could be one of most exposed country in sub-Saharan Africa in terms of the impact of a hard Brexit on the continent.
Volatility in financial markets and increased investor risk aversion are considered to be the main challenges brought about by a hard Brexit, not just for South Africa but sub-Saharan Africa as a whole. Brexit is expected to result in losses to trade, tourism and aid across Africa. The uncertainty associated with the continuously changing nature of Brexit has also affected investment in the region. Reductions in export demand and disruption to supply chains between Africa and the UK could be real challenges after Brexit. However, Brexit also offers new export opportunities as partnerships and agreements are formed across the continent.
There is hope that Brexit could impact positively on investment between the UK and Africa, in that it has resulted in UK trade outreach initiatives to numerous historic trade partners on the continent. The UK has been working with Africa countries to replace existing EU trading deals with new UK trade agreements, and the co-operation between the UK and continent has extended beyond trade to include collaboration in research, innovation and technology.
In 2018, the-then Prime Minister Theresa May announced on her visit to South Africa that the UK would invest an additional GBP 4.5 billion in African economies. May also said the UK would carry over the European Union’s Economic Partnership Agreement (EPA) with the Southern African Customs Union (SACU), comprising Botswana, Swaziland, Lesotho, Namibia and South Africa, as well as Mozambique, once the EU’s deal stopped applying to the UK. In September 2019, the South African Minister of Trade and Industry, Ebrahim Patel, said that SACU and Mozambique had agreed in principle to a new EPA with the UK, and that the parliamentary processes to bring the agreement into effect were in progress. The new agreement will allow the countries to continue to trade on the preferential terms set out in the current EPA. In January 2019, the UK’s Department for International Trade (DIT) confirmed they had signed agreements with Eastern and Southern African (ESA) countries, namely Madagascar, Mauritius, Seychelles and Zimbabwe. Engagement is still ongoing between the UK and the African countries of Tunisia, Morocco, Ghana, Kenya, Egypt, Côte d’Ivoire, Cameroon and Algeria.
According to the DIT, if the UK leaves the EU without any of these agreements in place, trade with these countries will take place under World Trade Organization rules. On balance, this is expected to result in higher import/export tariffs for all parties, and agreements that are more limited in scope than at present.
The South African president has also been encouraging trade relations and garnering support at the recent G7 Summit in France, not just for South Africa, but also for Africa as whole, in terms of South Africa’s forthcoming role as chair of the African Union for 2020. As such, President Cyril Ramaphosa has been vocal about the opportunities for trade across Africa that AfCFTA will bring.
And as parts of the world appear to fragment or turn inwards, AfCFTA provides a new opportunity for African nations to work together and speak with one voice. The recent launch of the operational phase of the agreement is considered to be a positive step, not just for the African continent, but for world trade in general. AfCFTA is the first continent-wide African trade agreement, with the potential to facilitate and harmonise trade and infrastructure development across Africa. It includes protocols, rules and procedures on trade, simplified customs procedures as well as dispute resolution mechanisms – all aimed at creating a single legal framework for the continent, and making it easier to trade and invest across borders. AfCFTA covers a market of more than 1.3 billion people, with a combined GDP of more than US$ 3.4 trillion.
So, where there are tendencies in some parts of the world to build barriers to trade, the development in Africa and the strong support for AfCFTA globally is a very positive indication that collaboration still counts and that there is still a strong belief in free trade to the benefit of many. Brexit may therefore provide a unique opportunity for African nations to work together, both to negotiate more advantageous trade deals post Brexit, but at the same time, to show the world that free trade between cooperating countries can lead can great things.
By Morne van der Merwe, Managing Partner and Head of the Corporate/M&A Practice, Baker McKenzie Johannesburg