Brexit; the word on everyone’s mind. Last month markets witnessed in shock, a historic event when the UK decided to exit the European Union with the final result being 51.89% for the exit and 48.11% against; a close call. Scotland would have made a large contribution to the 48.11%.
Which poses the question; will Scotland or Ireland call for another referendum to determine their independence? With the previous referendum Scotland voted to remain in the EU, with 68%. Beyond that we may see other EU countries such as Denmark and Sweden holding referendums to explore exiting, which would make Brexit the start of some major changes and turmoil.
David Cameron has resigned effective from October and although Brexit will take two years to implement, the immediate effect is already showing with Global Markets tumbling. As what often happens with market volatility Gold has jumped up 20% with the lead up to the referendum and will most likely continue to climb.
The effect of Brexit on South Africa
South African markets fell 3.76% today on the back on this news, with the Rand plummeting by 7.8%, more than the day Jacob Zuma fired Nene!
The UK is South Africa’s 8th biggest trading partner with exports totalling R41 Billion and imports of R35 Billion. So no new changes in terms of policies or trade will come into effect just yet. However, the Rand to the Pound has been effected, with the Rand trading at R20-54 to the pound on the day the news broke.
Brexit in Britain
The Sterling currency has seen a huge drop against the Dollar, the worst since 1985. Making it is the worst performing currency tracked by Bloomberg this year.
Boris Johnson may be the next Prime Minister and must be pleased with the outcome, but at what price? London was seen as the financial hub of the EU, but that may now fall on Dublin or Amsterdam. I’m sure David Cameron who called for the referendum, will be feeling the impact the most and may question if it was a wise choice. Another sector will be Banking, as these shares will be hard hit in the UK by this outcome.
While France and Germany will do their best to encourage the remaining EU members to remain within the fold while the falling markets will fuel the fires. The Dow has had its biggest intraday drop in 10 months. It fell 2.5% today. US Government bonds are already in demand.
South Africa has been affected but there is little the government can do. Trade links are based upon agreements and that will remain in place for now. Treasury and the Reserve bank will have to keep a watchful eye on developments. South African banking institutions should remain resilient but there share prices may drop.
A drought has seen us importing food and with a falling Rand, the effect will be higher food prices and put pressure on our inflation which is outside of the 6% target that Government is trying to maintain. South Africa will need to focus on their own efforts to keep us away from junk status and already have their hands full. For now, brace yourself for a bumpy ride…