Brexit: UK Credit Rating Downgraded

British goods and services may be cheaper in Nigeria How it affects us, by Herbert Wigwe
Vincent Obia, Kunle

Some of the wider implications of Britain’s decision on Thursday to leave the European Union, commonly called Brexit, have started manifesting. The country left the EU after 51.9 per cent of voters backed the exit in a referendum with serious consequences for the British and global economies.

As a foretaste of what is to come, at the weekend, Britain’s credit rating was downgraded.

The rating, which was done by Moody’s, one of world’s foremost credit ratings agency downgraded the UK Government’s bond rating from stable to negative in light of Britain’s decision to leave the European Union.

Moody’s warned that Britain’s economic growth would be weaker, its economic policymaking may be diminished and the government’s fiscal strength reduced.
“Moody’s expects a negative impact on the economy unless the UK government manages to negotiate a trade deal that largely replicates its current access to the Single Market.

“However, at the moment there is substantial uncertainty over the type of trade agreement that could be achieved,” the rating agency said.
The agency also affirmed Britian would remain on the AA+ rating, three years after it cut Britain’s AAA rating.

Brexit is already having effects on Africa, particularly, Nigeria. Nigeria, a former British colony and member of the Commonwealth, is Britain’s second largest trading partner in Africa after South Africa, with £6 billion (about N2.4 trillion or $8.52 billion) in bilateral trade volume last year.

As a fallout of the Brexit also, the pound sterling, the British currency, fell against major currencies, including the naira, the Nigerian currency.
The pound sterling plummeted about 11 per cent to $1.3305, on course for its worst day on record.
In Nigeria, on the day the result of the referendum was announced, the pound sterling exchanged for N386.26 at the interbank market, a significant fall from N414.70 it exchanged the previous day. The implication, experts believe, is that goods and services from the United Kingdom may be cheaper for Nigeria.

Also, the NSE All-Share Index (NSE-ASI), which rose by 3.13 per cent to 31071.25 on Thursday from 30,127.82 on Wednesday, fell by 1.35 per cent on Friday to 30,649.66 from 31,071.25 the previous day. However, overall for the week, the NSE-ASI and Market Capitalisation appreciated by 4.79 per cent to close the week at 30,649.66 and N10.527 trillion respectively.

According to the Group Managing Director, Access Bank Plc, Herbert Wigwe, “There are a couple of things. First of all, Brexit itself has introduced volatility in the market place and what we have seen is a huge crash in prices internationally, both in terms of the equities market, the currency. The pound sterling has devalued against virtually all major currencies, and I think it will affect all assets prices in the UK.

“But if you come to Nigeria, on the face of it, what you see is that it will make importing goods from UK to be relatively cheaper. That is what devaluation, ideally, should do.”
However, Wigwe said, “But we didn’t know that it was going to play out exactly like that at a very short time because as a starting point, what you see is that most investors are extremely worried and are looking for a safe haven right now for their assets. So you find that people are investing in gold, people are moving to more stable markets.

“In the case of Nigeria, I don’t believe that we are going to see an inflow of investors just yet because of risk sensitivity that has developed from what has happened.”
The Access Bank managing director added, “So you now have a double whammy effect. First of all, you have been downgraded as a country at a time that people are risk sensitive. With Brexit they are running away from all those risks and now to find out that you have been downgraded. It could even put a lot of pressure on the currency, if you like. Because you are not likely to see the inflow which we are expecting given the liberalisation we had seen at the beginning of the week (last week) as a result of moving towards a market oriented policy.”

Fitch Ratings had last week downgraded Nigeria’s long-term foreign currency Issuer Default Rating (IDR) to ‘B+’ from ‘BB-’ as well as the country’s long-term local currency IDR to ‘BB-’ from ‘BB’.

Wigwe said, “Because we’re downgraded in the course of the week (last week), it has now made us risky in the perception of the investing public, and even to borrow money becomes much more expensive. The whole situation is exaggerated by the fact that investors are actually now seeking a safe haven particularly given the Brexit situation.

“So what you are likely to see is that the capital flows that you expected to come into Nigeria which would have supported us and lead to the strengthening of the currency or perhaps more dollars for investment in different Eurobonds issued by the Nigerian corporates, is not likely to happen. That is what you are likely to see. Some people are likely to sell off Nigerian assets as well.”

The ripple effect was also felt in other parts of Africa. For instance, in South Africa, shortly after the referendum was concluded, the value of the South African Rand decreased by four per cent against the Dollar.

Nevertheless, analysts have said Brexit will affect Nigeria’s finances in two ways. First, it will expose the Naira to currency volatility. But fortunately, the Central Bank of Nigeria has already floated it, having adopted a flexible forex policy the previous week. In the new forex regime, Nigeria has seemed to manage the situation with its intervention in currency markets.
Speaking on Brexit’s consequences also, former Director-General, Nigeria Institute of International Affairs (NIIA), Prof. Bola Akinterinwa, said, “With the Brexit, the Pound Sterling has fallen as against the U.S. Dollar; the Euro too has fallen.

“Investors, immediately, for fear of the unknown began to move their investments, thinking of relocation and that immediately affected the value of the Pound and it began to fall. So, the parity of the Naira to the Pound Sterling, if the Pound Sterling is falling, is good for Nigeria; it is a welcome development at that level.”

In the area of trade, Britain and Africa have enjoyed excellent trade relations, but this may be impaired consequent upon the referendum. The way trade deals, essentially European Union’s trade deals with Africa, are done would definitely not be the same again since they would have to be renegotiated. Specifically, Nigeria and some African countries, including Ghana, Kenya, and South Africa, are members of the Commonwealth with Britain. Nigeria has been enjoying the privilege of a free trade tariff access of the British to EU, but with Brexit, it may become a little bit difficult for Nigeria to continue to leverage such opportunity.

He said Brexit would negatively impact Nigeria’s economic relationship with the EU. For instance, it would jeopardise the Economic Partnership Agreement (EPA) with the EU.
“With the withdrawal of the British from the EU, now the EPA will no longer apply to Nigeria within the framework of Nigeria’s bilateral relationship with the British,” noted Akinterinwa.
With the current scenario, being an oil-dependent country, Nigeria would also have to contend with the slowing recovery of crude oil prices.

Should the Brexit trigger a recession in Europe, demand for oil in the world’s second-largest oil market will fall even more. The decline would resonate in the world’s fastest-growing oil markets, India and China, because lower British demand would mean slackened demand for oil overall, prolonging the global oil price recovery.

If prices were to fall much below $30 per barrel, Saudi Arabia and other Gulf Cooperation Council members would reconsider production cuts or freezes. If prices remain comfortably above $40 per barrel, on the other hand, they could continue with their current strategy, maintaining market share and waiting out a price correction. Weaker oil prices will ultimately impair revenue, hitting oil exporters’ currencies even harder and forcing them to draw on reserves, maintain austerity and issue more debt than expected.

Investment, Remittances, Aid
At a time when the Nigerian government is trying to fix an economy on the brink of a recession by removing strict currency controls and also liberalising oil prices, the immediate effect of Brexit will test the nerves of Nigeria’s economic managers as global markets plummet. Bilateral trade between Nigeria and the UK, currently valued at £6 billion (about $8.3 billion) and projected to reach £20 billion by 2020, will be disrupted as trade agreements made under the auspices of the EU have to be renegotiated.

Data from the National Bureau of Statistics shows that the UK was Nigeria’s largest source of foreign investment in 2015. A slowing British economy and its reverberating effects could signal a drop in investment, trade, and also remittances from the Nigerian diaspora who sent home $21 billion in 2015.

Reduced trade and investment from Britain will not necessarily be plugged by the rest of the EU. The EU will be looking to strengthen its internal ties, amid cheaper oil from Iran, cheaper labour from China and the Eastern bloc. There is little Nigeria has in competitive advantage over the aforementioned right now.

Brexit can bring about a weakened European economy. A weakened Europe would affect Nigeria in terms of aid donations to the country. It will be weakened in various respects because Britain accounts for about 15 per cent of EU’s operational budget.
There may be complications concerning the amount development grants Nigeria benefits from. The UK was one of the biggest supporters of EU aid programmes in Africa, both politically and financially. While the UK will most likely continue to honour its own aid commitments, a changing attitude to aid could evolve within a UK-less European Union.

Zeroing-in on the UK itself, it has pledged 0.7% of its Gross National Income (GNI) to development aid. While it probably won’t go back on that promise, if the UK goes into recession and the GNI falls, that reduces the amount of money for aid in real terms and possibly prolongs the time frame in fulfilling its promises.

Immigration
Much of the debate running up to Brexit was on immigration. With the exit confirmed, Nigerians and other Africans living in the UK, as well as those hoping to go to the UK will be concerned about their status. It’s unclear what exactly a post-Brexit immigration policy would look like. Some analysts believe that controls are bound to be tighter.
However on the flip side, in order to boost trade relations with several African countries, the UK could make immigration for Commonwealth citizens slightly easier, especially as the IMF predicts that by 2019 the Commonwealth will contribute more to the world’s economic output than the EU.

So, Nigerians and other African citizens whose countries are members of the Commonwealth may have an easier time immigrating to the UK than those from non-Commonwealth African states.

Political implication
Thursday’s decision by Britain to leave the European Union is replete with political implications for Nigeria and Africa. It may potentially heighten nationalistic pressures among Nigeria’s disparate ethnicities. Already, the Indigenous People of Biafra, a group in the Igbo South-east agitating for an independent state of Biafra, has launched a campaign slogan, ’Biafrexit, to give a fillip to its cause.

Spokespersons of IPOB, Mr. Emma Nmezu and Dr. Clifford Chukwuemeka Iroanya, announced the new campaign motto yesterday in a statement titled, “There must be ‘Biafrexit’ in line with the just concluded ‘Brexit’,” released shortly after the result of the UK referendum was made public. They said, “The British government, which is the closest ally of the Nigerian government, must, as a mark of exemplary leadership, guide Muhammadu Buhari and his colleagues to organise a Biafrexit akin to the recently organised Brexit.
“The Indigenous People of Biafra congratulates the government and people of Britain for organising the Brexit vote and applauds the British government for respecting the wishes of her citizens.”

Similar agitations may also be triggered in other heterogeneous African countries.
At the continental and sub-continental levels, too, states may feel more disinclined to take active part in multilateral unions.

The African Union, which was established on May 26, 2001 in Addis Ababa and launched on July 9, 2002 in South Africa to replace the Organisation of African Unity, was modelled after the EU. The 54-member continental body – with only Morocco as a non-member – may lose its appeal and importance before member states, with more tendencies to toe the Moroccan line. Morocco withdrew from AU following the union’s recognition of the Sahrawi Arab Democratic Republic (Western Sahara) as a member state.