Monday, October 25, 2021

‘Beef and diamond exports to UK will decline in value and quantity’

Officially, Botswana never took that much interest in Brexit, preferring to see it as something that would happen too far away from its soil. However, as a finance lecturer at the University of Botswana warns, the country is about to suffer catastrophic effects of the United Kingdom’s decision to leave the European Union in the near and long term.

“Our main exports to both the EU and UK, which are beef and diamonds, will decline both in value and quantity. The values will go down because of a weaker pound sterling which has already lost more than 10 percent and continues on a free fall,” says Ishmael Radikoko adding that the latter means that revenues remitted back to Botswana from the export of the two commodities will be lower in pula value.

His prediction is that in the long run, the country might lose access to some of its EU beef markets. This is how: Botswana has a storage facility in the UK from which its beef exports are redistributed to other EU markets at no cost. A related downside he foresees is of Botswana having to pay tariffs on exports to the UK because trade rules and regulations that govern the EU will no longer be applicable in the former.

A few weeks back, the EU signed its first comprehensive economic partnership agreement (EPA) in Africa with the Southern African Development Community. It is expected that this EPA will lead to greater trade between the EU and SADC but in Radikoko’s assessment, trouble lies ahead. He says that the EU currency ÔÇô the euro ÔÇô is also experiencing downward pressure as Brexit shock ripples are felt by EU members. Indeed the euro dropped sharply against the dollar on Friday.

“This has a potential of squeezing government revenues and hence short economic downturn in Botswana. Quantities of our major exports will go down because imports in the UK and EU bloc are expected to reduce in the wake of weaker currencies, especially the pound. Investment in capital markets are expected to reduce as investors disinvest from capital markets, especially equities, to other alternative assets which are assumed to store value during economic hardships,” Radikoko states.

At this stage in their development, Botswana’s capital markets are largely made up of equities than bonds as the bond market is still developing.

Amid the chaos that roiled world markets on Friday morning, gold is proving to be as resilient as ever on account of being a global safe haven investment. As Radikoko attests, “gold in global markets has already shown positive gains as investors generally divest from more risky securities to gold as a store of value.” On Friday, gold dealers in London (where sales picked up earlier this month after polls first began to suggest that the “Leave” campaign had edged into the lead) reported surging demand for gold coins and bars. Gold delivered double-digit percentage gains in sterling terms on Friday, topping 1000 pounds an ounce for the first time in over three years, and soared as much as 8 percent in dollars. In the United States, investors pushed the price of gold up more than 4 percent to $1,315 per ounce. Shares of gold mining companies also went up by about 4 percent. Markets also saw a stampede into other safe haven assets like government bonds as well as certain currencies like the Japanese yen and the Swiss franc. According to Fortune, physical gold demand among consumers is also expected to rise in the remainder of the EU, on fears that other countries could also seek referendums on exiting the bloc.

The Botswana Stock Exchange (BSE) will also experience this golden opportunity. Radikoko says that he expects the NewGold Exchange Traded Fund, which trades on the BSE, to also have a notable positive charge as most equity prices plummet. He adds though that the Brexit impact on Botswana’s capital markets is not expected to be immediate as has been the case in the markets of other developing economies.

“But in the next couple of month the impacts should be felt in Botswana as well. Capital markets in Botswana will [experience] volatility and lack of liquidity will increase. Both these factors will have the effect of reducing total returns from investments in the form of capital gains yield and dividends as well as yield on bonds making capital markets unattractive,” Radikoko says.

At least according to his analysis, the one other silver lining in the dark Brexit cloud is that in the short run, “no major impact is expected as business is expected to continue as usual.”

Perhaps like much of the world, Botswana had misplaced confidence in a “Remain” victory with both the public and private sector approaching Brexit with a business-as-usual mindset. While some top Canadian pension funds held back on UK deals until after the June 23 referendum, Sunday Standard learns that Botswana’s pension funds were not exercising similar caution. Even before the Thursday vote, Radikoko cautioned that the country should not be relaxing over the Brexit issue. His advice was that the country should get ready to absorb as much of the impending economic shock as possible.

“The impact might not be felt immediately after the voting in favour of Brexit but as a way of getting ready as an economy, we might need to start reducing some capital expenditure projects that are currently planned and putting some projects on hold to observe the situation. Only projects that will translate into immediate economic impact will have to be considered,” he said two months ago adding that at the same time, Botswana had to come up with alternative ways of raising revenues because the mining sector, which is the backbone of the economy, is going through a rough patch.

The situation could get worse with some analysts already predicting that other EU members like France, Greece and Spain may want to Frexit, Grexit and Spexit. That would mark the end of the EU and with it, the EPA it signed with SADC three weeks ago. Following the outcome of the Brexit vote, UK itself might disintegrate: on Friday some powerful voices from within Scotland’s ruling party started pushing for a second independence referendum.

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