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What does Brexit mean for South Africa?
The pound is trading at record lows as uncertainty over the financial future of the United Kingdom is spreading across the continent and around the world. Theresa May has indicated that she will trigger Article 50 by March 2017, after which the UK will have two years to officially exit the European Union. So what does it all mean and why has the pound suffered such big losses since June? What does it mean to South Africans?
The UK central bank has indicated that they are ready to act and lower interest rates should Brexit cause the economy to slow down. Expectations of lower rates have resulted in a weaker currency, with money leaving the UK for emerging markets such as South Africa, India, Brazil and other countries which have “yield”. Another factor that has caused the pound to fall is that when a country leaves a trade block like the EU, capital and goods can’t flow freely across the border. This places pressure on the UK to re-negotiate separate trade relations with each of its trading partners.
Much of the pound's weakness is due to the uncertainty over whether the UK will be able to successfully re-negotiate all of its trade agreements and whether or not London will remain the financial hub of Europe.
What does Brexit mean for ordinary South Africans? The UK is one of South Africa’s biggest trading partners. Brexit implies that new trade agreements will have to be agreed upon. South Africa's wine and fruit industry might very well welcome new trade agreements as the current agreements are very strict. However, exporters will struggle to be competitive under the current ZAR rate. Tourism from the UK might very well drop off as it becomes expensive for UK citizens to travel abroad.
The weak pound has caused some JSE-listed companies with UK exposure to drop in price. Capco, Mediclinic, Discovery, Reinet, Brait and many more have all de-rated. These companies, which earn some, if not all of their revenue in the UK, will now earn less pounds for each rand, resulting in the price drop. Despite the drop in share prices there are positives that go along with the stronger rand. A strong rand is good for consumers as prices tend to drop with the lower import prices and cheaper logistics due to lower fuel prices. For lenders, interest rates are unlikely to rise as inflation is set to fall. Travelling abroad also becomes cheaper and the current rand strength may help South Africa avoid a downgrade in December.
Publication date: 10/11/2016
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