BREXIT AND AFRICAN MARKETS

Trade relations between the EU and Africa are defined by the Cotonou Agreement of 2000, as well as a series of so-called Economic Partnership Agreements between the EU and the five African Regional Economic Communities (RECs), for instance the CEMAC in which Cameroon belongs. The agreements outline bilateral privileges for the exchange of goods and services.

Initially, Brexit would fundamentally change contractual trade agreements between Europe and Africa. Nevertheless, the British government will proceed pragmatically and uphold existing contracts within the framework of the Cotonou Agreement, as the UK’s trade deals with Africa are essentially the EU’s trade deals with Africa. As the UK exits the European Union, all of those deals will have to be renegotiated. It’s likely, though, that the UK will simply keep the same trade deals with its African partners for the foreseeable future. However, developmental cooperation will have to be restructured.

The EU is Africa’s most important donor in the area, and Britain – due to its colonial past – contributes much of its aid. The UK has pledged 0.7% of its Gross National Income (GNI) to development aid. Now, while it probably won’t go back on that promise, if the UK goes into recession and the UK GNI falls, that reduces the amount of money for aid in real terms. More than this, the UK was one of the biggest supporters of EU aid programs in Africa, both politically and financially. While the UK will most likely continue to honor its own aid commitments, a changing attitude to aid could evolve within a UK-less European Union. The same principle applies to the EU’s Common Agricultural Policy (CAP). What about foreign direct investment (FDI)?

For 2014, the total FDI flows from the UK to African economies were only about 16% of total flows to the continent. In terms of the stock of FDI, a measure of the total value of investments in Africa, the UK’s portion was only 8% in 2014 (both estimates obtained from combining ONS and UNCTAD data). Because the UK mostly invests in mining, quarrying and financial services, and mostly in South Africa; sectors that are hardly the type to drive self-sustaining and job-creating growth on the continent.

The impact of BR-EXIT on Cameroon treasury bonds

With the BR-EXIT, will the mortgage repayments of Cameroon EURO-BONDS will be higher or lower?

The main question to be asked here is the BR-EXIT vote can result in a spike in risk aversion and a notable selloff of Cameroon EURO-BONDS? The BR-EXIT may result in rising yields and widening credit spreads, which are the yield differentials between corporate bonds and Treasuries’ of similar maturities. It is important to note that, yields on dollar bonds across the continent have risen steadily after the BR-EXIT vote. Today (9 August 2016), there is good news coming from Standard & Poor’s. The latest Standard & Poor’s credit rating for Cameroon stands at B with stable outlook. Moody’s credit rating for Cameroon was last set at B2 with stable outlook. Fitch’s credit rating for Cameroon was last reported at B with stable outlook.

 Therefore, despite a challenging economic backdrop dominated by recent falling international commodity prices, lower demand from China and the prospects of the Fed eventually hiking rates, Euro-bond issuance by Cameroon is well on track and continued. However, with the long term consequences of the BR-EXIT, existing Euro-bonds are widely shielded by their fixed coupon structure and long maturities, which mean that most principal repayments are still years away. Cameroon Euro-bonds issuance’s need to continue.

 Although the external environment is likely to remain challenging for frontier markets with European Union countries, it is important for the Cameroonian government to continue issuing Euro-bonds, albeit order books that might be smaller and yields higher. Unfortunately, because the ongoing drop in commodity prices reduces fiscal and external revenues in Cameroon, in order to mitigate sharp compression in fiscal spending and imports that would damage growth, borrowing must be increased. Therefore new emissions of EURO-BONDS are needed! As the national debt markets being small and illiquid, part of these borrowing needs will be financed through Euro-bonds.

 With the BR-EXIT, the Euro-bond issuance is likely to change the composition of Cameroon external debt. Despite the recent increase in international issuance, bonds still account for only a small fraction of Cameroon’s external debt. Most of Cameroon’s external debt still takes the form of multilateral or bilateral official debt. Given the current market turmoil after the BR-EXIT, and weakening currencies, foreign appetite for Cameroon assets is likely to remain muted and corporate Euro-bond issuance rare in the short term in the Republic of Ireland (pro European), as many investors are looking currently for Russians Euro-bonds.

 UK impact on Africa’s development

The biggest impact of the Br-exit on Africa would be the end of British outwardness; the country’s concern with and responsiveness to global development issues, which, from an African development perspective, reached its peak in 2005 during the UK presidency and the undertakings during the G-8 Summit in Gleneagles in 2005. During the G8 Summit, the gathered leaders agreed to double aid to Africa and eliminate outstanding debts of the poorest countries. Indeed, one of the major successes of the G-8 UK presidency was the agreement to provide debt relief to the poorest African countries. The G-8 countries agreed to increase aid to developing countries by $50 billion a year by 2010 with at least half of this commitment going to Africa. Other commitments included increased support for African peacekeeping forces and additional investment in education and the fight against HIV/AIDS, malaria, tuberculosis, and other diseases.

 Analysts agreed that, the Br-exit could lead to a retrenchment from outwardness with possible negative implications on the UK’s development initiatives. At a time when the process for IDA18 replenishment is underway, the Brexit is not good news for aid recipients, in which many African countries including Cameroon. Let’s have a closer look at the impact of the Brexit on bilateral development assistance.

 What analysts said

What can be done in Cameroon in order to be proactive vis-à-vis future directions that the UK intends to follow with the BR-EXIT? Let us just highlight what analysts said. Kevin Watkins, a Brooking nonresident senior fellow and executive director of the Overseas Development Institute (ODI), an international development think tank based in London, highlights the consequences of the BR-EXIT on the development assistance. He said that while a Br-exit would deprive the EDF of British resources for development assistance, Watkins argues that the direct disbursement of aid, set to replace the UK.’s contribution to the fund, from the UK to recipient countries will have a more narrow geographical reach than aid funneled through the EDF. According to him, Aid through EU institutions is just one part of the package. Collectively, the EU’s 28 member states spent some 56 billion euros in 2014, or 0.4 percent of their GNI. In terms of quality standards for transparency, efficiency and institutional development, the EU is roughly on a par with the U.K.

 Recent efforts to improve coordination have seen joint planning by EU donors in 40 countries, a move that could greatly enhance efficiency. In fact, despite the size of the aid budget and the strong mandate on poverty reduction enshrined in the Lisbon Treaty, the EU still punches well below its weight class on development assistance. Major economies such as Germany and France have failed to match the U.K.’s achievement of the 0.7 percent aid-to-GNI target. To make matters worse, the share of EU aid going to sub-Saharan Africa and the least developed countries has been shrinking from an inadequate base.

 Barclays thinks the UK is on the “cusp of recession,” Credit Suisse predicts that a recession will cost Britain 500,000 jobs, and Morgan Stanley says a recession is coming, though it was unsure of the specific details. Barclays identifies seven key reasons SSA growth is at risk from Br-exit. Take a look below:

  1. Br-exit could harm global demand for goods, particularly hitting African economies that are focused on the export of raw materials. This would lead to “slower growth and wider current account deficits,” Barclays argues.
  2. Weaker global demand could also, Barclays says, because key commodity prices to fall, further undermining the African economy, which relies heavily on exporting minerals, ores, and other commodities. The possible exception would most likely be gold, which has been boosted by market uncertainty since the referendum. Two of the world’s 10 biggest gold-producing nations are in sub-Saharan Africa.
  3. Tourism will dwindle. A key area of economic prosperity for African nations is tourism, particularly through safaris and other nature tours. The basic argument here is simple — if Brits and other Europeans are suffering through economic hardship, an African holiday will be far less affordable.
  4. Fewer African workers will be able to work in developed nations, which will reduce the amount of money sent back to SSA countries. As Barclays puts it, there will be fewer “economic opportunities for African migrants to the UK and Europe, and hence less workers’ remittances to home countries.”
  5. If things get really bad, aid from UK and European governments could start to dry up, robbing SSA countries of vital funding for infrastructure projects and other economically beneficial plans.
  6. Br-exit is causing heightened uncertainty and, in some respects, increased risk aversion. These factors are likely to increase financing costs and shrink capital inflows into sub-Saharan Africa.
  7. Earnings on sub-Saharan investments into Europe and the UK will be lower. That is likely to have the biggest impact on sub-Saharan Africa’s most developed nation, South Africa, which has substantial investments in Europe.

 The way forward

African countries needs a proactive approach to deal with the BR-EXIT.

FIRST. Develop a national task-force to discuss BR-EXIT implications of UK financial contributions on national projects.

SECOND. Develop linkages with CEMAC countries to propose them the way forward regarding BR-EXIT

THIRD. Same approach with commonwealth countries that are part of the Cotonou Agreement. 

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