|24. June 2016
Pravin Gordhan, Presidency move to reassure South Africans over Brexit
With the news that British voters decided to leave the European Union, emerging market currencies – including the Rand – have taken a beating.
Finance Minister Pravin Gordhan moved to reassure South Africans that the local financial system was sound in the wake of the massive upheaval following the Brexit vote. “The National Treasury and the Reserve Bank have met early this morning and are keenly monitoring developments that are taking place and the implications for South Africa,” Gordhan said. He committed to keeping the public informed of any further implications for South Africa and of any measures that needed to be taken in response to events in the UK. “The South African public can be reassured that our banking and financial institutions are well-placed to withstand financial shocks,” Gordhan said, adding that the local financial system had already demonstrated its resilience during the global recession of 2008 and 2009. “Equally, we are confident that our financial system, including the banks and the regulatory framework we operate under, are extremely resilient and reliable,” he said. The European Union is South Africa’s largest trading partner. According to the Department of Trade and Industry, the EU accounted for R216-billion of South Africa’s exports in 2015.
The trade links between South Africa and both the European Union and Britain are based “on solid agreements”, he said, adding that there was a two-year window within which to make any necessary changes to these treaties. In a statement, the Presidency said there would be no immediate implications for South African exports to the United Kingdom. According to the statement, the UK was South Africa’s eighth largest trading partner in 2015. It noted that until the end of the two-year period, in which Britain negotiated its exit, the Common International Trade Policy (CITP) of the EU would continue to apply to SA’s exports to the UK.
The CITP included the current free trade agreement between South Africa and the EU, called the Trade, Development and Cooperation Agreement (or TDCA). It also covered the Economic Partnership Agreement (EPA) that was recently signed on the 10th of June this year in Botswana. “Therefore, UK rights and obligations under the existing EU Treaties will continue to apply during this period,” it said. The economic consequences for the UK and EU themselves are however expected to be painful, with economic growth in both regions likely to decline. In a press statement credit ratings agency S&P Global Ratings said its initial estimates indicated that UK gross domestic product (GDP) could decrease by 1 percentage point in 2017. This was provided foreign direct investment does not “completely dry up” in reaction to the Brexit vote.
Its preliminary estimate for the Eurozone was a decline in growth by a 0.5 percentage point in 2017. Although the full extent of the impact is not likely to become clear for some years, the uncertainty and transitional costs of the UK pulling out of the EU are likely to slow growth materially, said Jean-Michel Six, S&P Global Ratings’s chief economist for Europe, the Middle East, and Asia. In the short-term, much would depend on the UK’s central bank’s ability to stabilise the pound, he said. The Bank of England (BoE) governor Mark Carney said in a statement on Friday that it and the UK Treasury had “engaged in extensive contingency planning” in preparation for a Brexit, and would “not hesitate to take additional measures as required as markets adjust and the UK economy moves forward”. To support the continued functioning of markets, the BoE was ready to provide over £250-billion of additional funds through its normal facilities, Carney said. It was also able to provide “substantial liquidity in foreign currency, if required”.
The UK’s banking system was more resilient following measures taken in the wake of the global financial crisis, with capital requirements of banks now 10 times higher than they once were, Carney added.
The central bank had stress tested them “against scenarios more severe than the country currently faces,” he said.