Senior Research Analyst
at FXTM
After more than 1200 days after Britain
voted to leave the European Union, the country still remains in the trading
bloc, pondering exactly how to leave. Although the October 31 “do or die”
Brexit deadline has been extended to January 2020, this is simply kicking the
can further down the road. With the United Kingdom set for general elections on
December 12, this will certainly not be a quiet Christmas for Britain and the
Pound.
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It will be unwise for investors to rule
of the possibility of the United Kingdom crashing out of the European Union
next year given the unpredictable nature of Brexit. The seismic tremors created
from such an unfavorable development will ripple far beyond the borders of
Britain, with everyone across the globe feeling the heat including those in
Africa.
Given how Brexit adds to the growing
list of geopolitical risk factors straining investor confidence, appetite for
emerging market may diminish if the UK leaves the European Union without a
deal. It is not only appetite for emerging markets that will be under threat
but trade and diplomatic relations with Britain and Europe following the
divorce. It must be kept in mind that trade deals with the UK and African
countries are negotiated through the EU which plays a middle man. With the
agreement becoming void when Britain departs from Europe, this presents
significant disruptions and economic risk to African nations who trade with the
UK.
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Britain’s top trading partners like
Nigeria, Kenya and Egypt will most likely be punished by a no-deal Brexit. The
UK was Nigeria’s 6th largest trading partner last year with total trade roughly
$5 billion. In 2018, Nigeria exported £2.23 billion worth of Oil to the UK, an
improvement over the level of £1.1 billion in 2017. But with the UK's economy exposed to downside
risks, the outlook for Nigeria's Oil sales appears less promising.
Nigeria's Oil sales in the UK and
Europe face another challenge. Over and above the UK's declining economic
circumstances is increased competition from the US Light Sweet Crude Oil
industry. In August, Oil sales slowed to
their lowest level of the year because US Shale Oil flooded European
markets. In July, Nigeria's Oil sales to
the US fell to zero as US president Donald Trump’s administration powered up
its energy dominance policy. It is essential for Nigeria to regain market share
in the UK and Europe, which accounts for 46% of its crude Oil sales.
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As demand and supply side challenges
grow, Nigeria could benefit from closer relations with the UK government, which
points out that it has extensive experience in building and managing oil
industry infrastructure. A trade deal which secures the UK as a guaranteed
buyer of Nigerian crude Oil could certainly support demand in the long term.
As part of its post-Brexit strategy,
the UK government hopes to revive its relationships with the Commonwealth
markets and has already begun talks with Nigeria to improve bilateral ties. In
one example, the UK provided credit and finance worth £1.25 Billion to
facilitate British companies to export goods to Nigeria, resulting in £76.5
billion worth of trade in the last 10 years.
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During the second quarter of 2019,
British Foreign Minister Jeremy Hunt visited Nigeria promising a big pool of
funds which could be invested in infrastructure. In other developments, the two
countries launched an economic forum to explore mutual investment interests.
The governments are already discussing the introduction of Naira-backed
financial instruments in the UK and expanding cooperation in the insurance
sector.
To wrap up, Nigeria's post-Brexit
relations with the UK are faced with several headwinds which could blow off
course the priority to maintain and increase investments in the development of
its Oil-and-Gas industry infrastructure. On the upside, it is positive that
trade talks with the UK are deepening and there are pre-existing diplomatic and
trading relationships which go back many decades.
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