The Brexit effect on Tourism in Africa

Britain’s recent referendum and vote to leave the European Union (EU) has caused wide-spread concern from various sources as to what the implications will be for existing trade agreements and markets worldwide. Historically, Africa has benefitted from the EU in many ways, specifically through Foreign Direct Investment (FDI), but some feel the restrictive trade agreements have impeded potential for growth in Africa.

As a result of Brexit, Britain’s trading and investment agreements with the African continent come under focus and the UK’s largest African trading partners, in particular South Africa, Kenya and Nigeria, could possibly see another impact on their financial stability. The UK is South Africa’s seventh largest import and export market with exports to the UK in 2014 totalling R42 billion and imports R35 billion.

Analysts predict that South Africa is amongst the African countries that will be worst affected, with the EU as its largest trading partner. Hundreds of existing EU trade agreements may need to be renegotiated by the UK within the next two years, which will disrupt trade and potentially cause a loss of investment into Africa, depending on the strength of the UK’s GDP. Financial analysts are debating how this will impact economies and trade in African countries and say the full effect remains to be seen.

Tourism is one of Africa’s biggest economic contributors, and the most immediate impact from the Brexit outcome is the value of the Pound, which plummeted following the referendum and is at its lowest in 30 years. Global markets shifted as the vote concluded.

With the instability of the British currency, UK residents, who contributed to 23.3% of South Africa’s tourists in December 2015, may be hesitant to travel to long-haul destinations such as Africa and the additional uncertainty around travel and health benefits that previously covered their holiday (Source: Stats SA). Statistics list the UK as the biggest international inbound tourism market to South Africa, revealing a total of 18.4% of tourists originating from Britain. The UK has always been favourable towards the weaker Rand and the benefits of travelling to South Africa meant the ability to enjoy five-star lodges and hotels, but with insecurity looming over UK residents regarding the short- and long-term impact of the separation from Europe, a weaker pound might well motivate some to cancel international (and African) vacations.

South Africa may well see a shift of tourists away from an embattled UK and Europe to be replaced by tourists from the East. However, with such a large portion of UK tourists historically travelling to Africa, CEO of the Airlines Association of Southern Africa (AASA), Chris Zweigenthal, voiced his concerns, “With expectations that the British exchange rate will remain at lower levels, UK residents are likely to pull back on international travel. The International Air Transport Association (IATA) is predicting UK passengers could decline by 3% to 5% by 2020 (Source: sabusinessintegrator.com).

According to Enver Mally, Chair of Cape Town Tourism, the tourism industry employs about 4.4% of all employed people in South Africa, so it is vital to prioritise the sector to create desperately needed jobs and retain economic growth. From Q4 2015 to Q1 2016, unemployment figures in South Africa rose from 24.5% to 26.7% (Source: Stats SA). Tourism contributes to 48 000 jobs and it is projected to grow to 10.5% of the GDP by 2025.

It is also worth considering that any further visa and immigration rule changes as a result of Brexit could significantly affect businesses in the hospitality industry both in the UK and South Africa.

When discussing the potential effects of Brexit on tourism, South African Tourism Minister Derek Hanekom said in July 2016 that he does not believe that there will be an immediate impact on tourism numbers to South Africa, but the after-effects of Brexit means that the exchange rate will not be as favourable as it was a couple of months ago. “If the British economy is profoundly affected, it will inevitably result in a drop in tourism. But whether it’s a dramatic drop in tourism and whether South Africa will be affected remains to be seen.”

The UK is the fourth-biggest destination of South African exports, although it accounted for only 4% of total exports in 2015, 20% of South Africa’s exports are directed to Britain. Of all the African countries, South Africa is the recipient of the largest portion (about 30%) of FDI from the UK. Moody’s rating agency listed that out of all Sub-Saharan Africa (SSA) countries, South Africa is the most exposed to the potential effects of Brexit, although it predicts that FDI and tourism will be worst hit, rather than the credit rating. South Africa relies heavily on capital investment to finance its economy, although the agency anticipates that South Africa should avoid junk status.

“We expect much of the immediate post-Brexit impact to manifest as gyrations in the financial markets, while the near-term effects on the real economy are likely to be less pronounced; the short-term impact of the vote on East African countries is likely to be only minor.”

Senior Financial Economist, Irmgard Erasmus believes that the main effect of Brexit on South Africa will be contained to the forex and financial markets over the short term. (Source: businessessentials.co.za) She said that commodity prices are likely to get hit, which will impact the balance of payments and consumer debt.

The Economist was also quoted as saying, “We expect much of the immediate post-Brexit impact to manifest as gyrations in the financial markets, while the near-term effects on the real economy are likely to be less pronounced; the short-term impact of the vote on East African countries is likely to be only minor.”

Other African countries are likely to experience the ripple effect. The UK is the largest exporter of tourists to Kenya. Kenya’s tourism already dipped over recent years due to security risks caused by militant groups. Kenya relies heavily on tourism and it is listed as one of the top safari destinations in the world. The UK only recently lifted its advisory warning for security concerns in Kenya and it is making a slow recovery, rated as B1 stable by Moody’s, but Brexit could be a further setback. The East African Community (EAC) is due to sign an Economic Partnership Agreement (EPA) with the EU in October. The Kenya Flowers Association has concerns that the EPA may not extend easy access to the UK.

Moody’s predicted that countries relying on trade via exports will experience reduced demand. Revised EU trade negotiations could negatively impact the Kenyan cut flowers and agricultural export market significantly. Kenya exported 1.3 billion euros worth of products to the EU in 2015. Many other bodies that have already signed EPAs, such as SADC and ECOWAS, will be looking for the agreements to be upheld. Investors will be seeking safe havens in gold and stocks and the Kenyan Shilling may suffer.

As a member of the British Commonwealth, Nigeria has strong political and economic ties with Britain and the volume of trade from 2015 was valued at $8.52 billion and projected to reach $25 billion by 2020. Moody’s rated Nigeria as B1 stable, but with Nigeria being Britain’s second-largest trading partner after South Africa, its economy will feel the impact and Brexit couldn’t have come at a worse time for the Nigerian economy. The drop in oil prices and local production already affected Nigeria’s struggling budget and some Nigerian banks. The UK is Nigeria’s largest source of infrastructure and investment, which could decrease if the UK’s economy suffers.

Mauritius is not immune to the Brexit-effect: It too relies heavily on tourism and exports and has close ties to the UK. Moody’s rated Mauritius as Baa1 stable, but in 2015, 11% of visiting tourists came from the UK. Mauritian exports to the UK stood at Rs11 billion in 2015, compared to an import of Rs3 billion. Mauritius predominantly exports textiles and garments (Rs 4.9 billion), fish (Rs 2.1 billion) and sugar (Rs 1.1 billion) to the UK, whilst tourism revenue from the UK amounts to Rs 4.8 billion.

With the impact on reserves and investments due to the high levels of uncertainty in financial markets, the tourism sector is likely to suffer. However, in 2017, production and export restrictions within Europe will be lifted as part of the Common Agricultural Policy reforms. If the UK leaves the EU, there will be an opportunity to tap the UK market directly in the sugar trade. (Source: businessmag.mu)

Egypt is less likely to be affected in comparison to South Africa and Nigeria, although it will feel the effects in its GDP with depreciation of currency and political instability. Egypt has a long history and strong diplomatic ties with the UK, specifically in the political, defence and trade industry. 30% of Egypt’s external trade is with the EU, and in 2015 it made up $10 billion of the $57.9 billion of Egypt’s imports. (Source: dailynewsegypt.com) The EU is Egypt’s primary trading partner and the free trade agreement that was signed in 2004 between the Egypt-EU Association is likely to be affected by Britain’s exit. The previous ease of trade and access to the EU market that Egypt had as a benefit will likely affect the volume of Egypt’s trade. Tourism is likely to suffer from uncertainty in the political climate.

Tourism from the UK brings in roughly 200,000 British tourists a year, but amidst curbing spending and terror fears there is likely going to be a decline. FDI, however, is likely to increase from both the EU and the UK, which currently stands at 41.5%, as Europe seeks to strengthen North African countries to help negate the migrant crisis. There are fears that FDI will decrease in Egypt but it is likely that the migrant crisis will be a priority.

According to the Johannesburg Stock Exchange, as the Rand tumbled against the Dollar following Brexit, foreigners bought South African shares at a pace that hasn’t been seen since 2009, buying a net R4.22 billion of the country’s stocks. William Jackson, senior emerging-markets economist at Capital Economics said, “it’s possible the actual economic impact of Brexit on South Africa may be small.” Jeffrey Schultz, an economist at BNP Paribas Securities in Johannesburg added, “Investment into South Africa has seen a turnaround since Brexit.” (fin24.com)

It is far too early to predict the outcome of Brexit on trade in Africa. In what will take months and possibly years to come, the effects on the African continent, specifically for trade partners, could be a suppressed demand in trade and most likely reductions in tourism from the UK, particularly if its economy goes into the predicted recession.

Brexit could, however, be beneficial to Africa if it has the foresight to prepare carefully articulated and negotiated trade deals with the UK. African countries could take advantage of the potential loss of the European market to the UK and take the opportunity to fill gaps in export trade.

This article was written NICOLE LESCHINSKY.