The impact of ‘Brexit’ on kenya

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Following the UK’s surprise vote to leave the EU, we assess the probable impact such a departure would have on African trade, investment, and security policy. In this free special report, EXX Africa analyses the impact of an eventual ‘Brexit’ on Kenya.  

On 23 June, the United Kingdom (UK) voted to leave the European Union (EU) in a non-binding advisory referendum, which resulted in the resignation of UK Prime Minister David Cameron and is likely to trigger fresh elections later this year or in 2017. Despite pressure from some EU countries, it is unlikely that exit negotiations will begin until a new UK government is firmly in place. There is a possibility that the next UK government will not trigger exit negotiations at all, based on a legal technicality or if it calls a second referendum.

Regardless of the probability of an eventual UK exit from the EU, the referendum result has caused market turmoil across the world, as investors worry that the result of the UK vote could drive fresh momentum to anti-establishment movements in other European countries. Global stocks lost USD2 trillion in value on 24 June and sterling fell to a 31 year low. UK companies and banks were some of the worst affected, with USD55 billion wiped off banking stocks. The price of commodities also fell, with the price of oil dropping 3.9% to USD50 per barrel. However, the price of gold gained 4.7% as a reflection of investors’ perception of gold as a safe haven. At the time of writing on 27 June, Asian stocks and the UK pound were extending losses.

In Africa, currencies, stocks, and bonds also tumbled as a result of the UK referendum vote. The South African rand fell by 8% against the US dollar, before recovering to trade at 3.6% weaker, while falling to a record low against the Japanese yen. Investors are worried that African countries will have less access to international capital markets, which would halt large infrastructure and other projects. There is also a concern that the UK will now disengage from Africa, as its economy inevitably slows, and foreign aid flows are cut. While the UK has a firm commitment to spend 0.7% of its gross national income (GNI) on development aid, an eventual recession in the UK would decline GNI in absolute terms and thus diminish development aid to Africa.

Moreover, any trade deals that the UK has in place with African countries are essentially trade agreements with the EU, which has exclusive jurisdiction over its members’ trade deals. Any exit from the EU could terminate the UK’s access to the EU’s single market, forcing the country to negotiate new trade accords with African countries, which is likely to be a cumbersome and lengthy process. It is however likely that the UK would leave many existing trade agreements in place and thus mitigate risk of trade disruption. In this special report, EXX Africa assesses the likely implications of a UK departure from the EU for some of the UK’s top African trading partners, as well as other implications on wider investment and security. We analyse two key drivers of risk, firstly the impact of a ‘Brexit’ on existing trade and other arrangements with the EU, and secondly the longer term effect of a probable economic slow-down of the UK economy, which is the fifth largest in the world with substantial ties to the African continent.

Kenyan 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.

Kenyan officials were quick to respond the market turmoil followed by the UK’s vote to leave the EU. Finance Minister Henry Rotich assured investors that Kenya has adequate foreign exchange reserves to absorb any shocks from the crisis. Kenya has USD5.6 billion in foreign reserves, which amounts to 5 months of import cover, which is higher than the four months the country usually holds. The central bank also said it would be ready to intervene in money and foreign exchange markets if required. Such assurances steadied the impact on the Kenyan shilling, but some banking stocks still suffered losses. Equity Bank and Co-operative Bank were down over 2% on 24 June, while other stocks were unchanged.

However, there is a risk of capital flight from Kenya as risk averse investors seek safe havens. This would weaken the shilling and increase import costs. Kenya’s import bill has steadily increased by more than 10% over the past five years. Another key concern would be that ongoing negotiations of a trade agreement between the EU and the East African Community (EAC) would be delayed as the EU copes with the UK’s departure.

The Kenya Flowers Association expects any such delays would cost the Kenya flower industry USD38 million per month. Horticulture is a primary export market for Kenya and over one third of the EU’s cut flower imports, mostly to The Netherlands and the UK, are derived from Kenya. However, it is likely that the UK would prioritise trade negotiations with Kenya given the two countries’ long-standing bilateral relations. Such negotiations could even benefit Kenya and other EAC countries, as Kenya gains leverage over setting trade terms.

Although a series of diplomatic disputes have strained British-Kenyan relations over the past few years, Kenya is likely to feature as the UK’s principal destination for emerging market investment. Despite diplomatic disputes, Kenya is likely to remain a preferred beneficiary of British foreign investment in agribusiness (tea, tobacco) and in oil and gas, with the UK being instrumental in the development of Kenya’s region-leading financial sector.

Much like US investment, British investment is likely to increase in the renewable energy sector, especially financing and technical co-operation for geothermal, solar, and wind projects, which represent lower-risk sectors. Given these interests, and the large presence of British expatriates and tourists, the UK is likely to maintain security co-operation towards mitigating the threat posed by Islamist militant group al-Shabaab, which has British nationals active within its ranks.

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