As soon as "leave" became the outcome of the 2016 U.K. Brexit Referendum, the future of trade between South Africa (SA), the United Kingdom (U.K.) and the European Union (EU) was thrown into flux. Upon the 31 December 2020 Brexit transition deadline passing, a new set of parameters will govern the multi-faceted commercial dynamic.
South Africa's Trade Relations With The U.K. And EU
South Africa's trade relationship with the EU and U.K. relies heavily upon the production and exportation of commodity products. SA's leading raw material exports are gold, diamonds and platinum. With respect to finished and semi-finished products, the goods export list is headlined by foodstuffs and motor vehicles. Also, service exports are highlighted by a strong financial sector led by the banking industry and Johannesburg Stock Exchange (JSE).
South Africa is the primary trading partner of the U.K. on the continent of Africa. According to United Nations (U.N.) statistics dated 2015, the U.K. is SA's eighth largest import/export partner. Reports from the U.K.'s Foreign and Commonwealth Office (FCO) classify the U.K./SA relationship as being "broad and deep" with respect to the following metrics:
- Two-way goods and services trade are worth an estimated £5 billion yearly.
- British companies account for £12 billion in domestic investment, making the U.K. the single largest foreign investor.
- An extensive tourism interrelationship exists, with 275,000 South Africans and 400,000 Britons traveling between the nations annually.
- Expatriate rates are high, with 750,000 Britons living in SA and 350,000 South Africans living in the U.K.
The scope of SA's trade relationship with the EU is a bit more complex than that of the U.K. Commerce with eurozone countries is governed by the Trade, Development and Cooperation Agreement signed with the EU in 1999. Below are a few economic facts that illustrate the degree of SA/EU interdependence:
- South Africa is the EU's largest trading partner on the continent of Africa. As of 2018, the annual bilateral goods trade measured more than €40 billion. The two-way service trade for 2017 came in just below €15 billion.
- South Africa's primary exports to the EU are fuels, mining products, machinery and transport equipment.
- The EU's leading exports to SA are machinery, transport equipment and chemicals.
- Germany is the third-largest export destination for SA goods and services. In addition, Germany ranks as the second-largest provider of imports.
Although the EU and U.K. are behind China in terms of SA trade, they are still valued partners. Regulations governing SA's trade with the EU are unlikely to immediately change upon the 31 December 2020 transition deadline passing. Conversely, relations with the U.K. are a much different story. Given the lack of any precedent to follow, SA will be commissioned with the task of negotiating brand-new trade deals with U.K. leadership.
Post-Brexit Economics For South Africa
As illustrated by domestic currency, equity and commodity market performance, Brexit's impact on SA has been extensive. While SA's economic fate is a hotly debated topic, many experts agree that the U.K.'s exit from the EU has destabilised the existing commercial environment.
An Uptrend In The South African Rand (ZAR)
For holders of the South African rand (ZAR), the Brexit transition brought times of extreme volatility. Aside from the initial shock of the 2016 vote, foreign exchange rates pertaining to the ZAR remained relatively stable. In fact, from 1 June 2016 to 3 February 2020, the rand overcame periodic turbulence to hold its ground against the majors:
- ZAR/USD: The rand gained 32 pips vs the U.S. dollar (5.07%).
- ZAR/EUR: Against the euro, the rand gained 31 pips (5.47%).
- ZAR/GBP: The rand posted a 66 pip rally versus the pound (15.03%).
- ZAR/CHF: Performance against the Swiss franc was modest, ticking higher by 9 pips (1.4%).
Past performance is not indicative of future results.
One reason the ZAR was able to overcome the uncertainties presented by the Brexit transition was the performance of gold. Spot gold (XAU/USD) pricing entered a long-term bullish trend, gaining US$371.17 per ounce (30.5%) from 1 June 2016 to 3 February 2020. Accordingly, the increasing international demand for gold boosted the relative performance of SA's mining and commodity export sectors.
Stock Market Rally
Due to SA's trade arrangements with the U.K. and EU, there are several key stock market correlations. As the world's 19th largest equities exchange, the JSE is a popular venue for international investment. In addition, the interrelationship with the U.K. is extensive and features the cross-listing of numerous publicly-traded companies.
The post-Brexit era brought prosperity for the leading stocks listed on the JSE, London Stock Exchange (LSE) and Eurex. From 1 June 2016 to 3 February 2020, the performance metrics of various leading equities indices exhibited a positive correlation:
- JSE Top 40 Index: The JSE 40 posted gains of 2003 points (4.1%) during the Brexit transition period.
- FTSE 100 (LSE, Euronext): Over the course of the Brexit saga, the FTSE 100 rallied by 465.87 points (17.7%).
- Euro Stoxx 600 (Eurex): Like the JSE 40 and FTSE 100, the Euro Stoxx 600 appreciated in value, trending higher by 68.6 points (20.1%) over the transition period.
Past performance is not indicative of future results
Immediately following the 2016 Brexit Referendum, financial heavyweight Goldman Sachs projected U.K. GDP to slow by 2.75% in the subsequent 18 months. Although prognostications of this sort proved extreme, they weren't uncommon. As a result, considerable angst plagued JSE, LSE and Eurex participants. However, the pessimism didn't last, as a long-term global economic growth cycle trumped concerns over Brexit fallout.
Will South Africa Prosper Post-Brexit?
Until the 31 December 2020 transition deadline, SA/U.K. trade will be governed by the tenets outlined in the EU's Economic Partnership Agreement (EPA). After that, terms of the SA/U.K. trade association will need to be renegotiated.
Optimists point out that the ability for the U.K. and South Africa to craft unilateral trade deals as being potentially lucrative for SA. Two potential benefits could be reduced tariffs and lowered barriers to the flow of U.K./SA goods and services. If this assumption proves correct, the estimated R140 billion in annual bilateral trade could expand. In addition, SA's single largest trading partner is China (9.5% of exports, 18.3% of imports). Given the added leverage of access to the Chinese consumer market, negotiating beneficial trade agreements with the U.K. may be possible.
On the other side of the argument, critics believe that Brexit has placed South Africa in a weakened global position regarding foreign trade. The pre-Brexit Economic Partnership Agreement (EPA) allowed 90% of SA exports to enter the U.K. completely or partially duty free. In the event that the SA and U.K. cannot craft a trade deal, commerce between the two nations will fall under the jurisdiction of the World Trade Organisation. This would boost tariffs on many SA exports, including a 10% increase on automobiles.
As of this writing (28th February 2020), the pre-Brexit EU, U.K. and SA trade agreements are still in place.
The U.K. vote for Brexit and subsequent transition period has brought a high degree of uncertainty to the SA economy. As a result, the rand and domestic equities markets have faced a collection of unique challenges.
Ultimately, the post-Brexit economic prowess of SA will rely on successfully renegotiating trade agreements and capitalising on bullish commodity market performance. If SA can secure positive trade deals and enjoy stable commodity prices, then the nation will be in a position to achieve sustainable economic growth.
Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation…