There’s something happening here…what it is ain’t exactly clear
By Ilan Preskovsky
The past couple of months have been some of the most tumultuous the West has seen in quite some time. Not quite as horrifying as the 1940s or as explosive as the 1960s, perhaps, but the winds of change are once again a-blowin’.
It all started with the shocking vote by the (slight) majority of British people to have the UK leave the European Union and culminated in the still-fairly-unbelievable escalation of what started with the almost farcical announcement of Donald Trump’s candidacy for American president through his rather less comical rise to be the Republican party’s nominee and, ultimately, his being elected the President of the Free World. This is a man who, on the most basic level, had never held public office and handily beat a veritable army of seasoned politicians to the highest position in the land and whose popularity with his supporters hasn’t waned an inch since then.
On the other side of the Atlantic, the rise, fall, and rise of populism in Europe has been eclipsed only by the amount of Islamist terror attacks that have shaken Paris, Brussels, Berlin, and, most recently, London and Manchester. The influx of refugees from the Syrian civil war into Europe has only exacerbated things as this act of crucial humanitarian aid for people who suffered under the most horrific of circumstances has, at the same time, created strife throughout Europe with refugees struggling to fit into a culture that is, in many ways, the polar opposite of their own, and whose presence in Europe has only emboldened the populist right in a wave of Xenophobia that the continent has not seen since World War II.
At the same time, though, for every time that fear, hatred, and fascism have threatened to overthrow Europe, something has occurred that has prevented the continent from being pushed totally over the edge. France, for example, may have come dangerously close to electing Marine Le Pen – by all indications, a far-right populist and nationalist – as president, but in spite of the worrying amount of support she received the election went to centrist Emmanuel Macron.
Over in the UK, just a month later, Teresa May’s Conservative Party hit their first major roadblock since their shocking Brexit victory, as their ploy to call an election to win the sort of parliamentary majority that would have ensured Conservative rule and allowed them to fast-track the UK’s exit from the EU under their terms backfired with them losing their majority thanks to a resurgent Labour Party. They remain the leading party in the UK, but their failure to nab a majority in Parliament means that they will have to form a coalition government with other parties to govern. This, despite the fact that two horrific terror attacks took place in the weeks and days leading up to the election – events that should have played right into the more reactionary hands of the Conservatives – and that Labour leader, Jeremy Corbyn, is a highly polarising and controversial figure, who has been accused of courting rampant anti-Semitism and alienating voters by moving the party too far to the left (and alienating others by not moving it far enough).
These truly are complicated, unpredictable times – to the point that I can only guess what might happen between this writing and publication in little over a month.
What Does the “Br” in Brexit Stand for Again?
While we South Africans may live thousands of miles from the focal point of these particular quagmires (and, let’s be honest, we have more than enough here to keep us on our toes), what happens in the US and the EU has a profound effect on us. In particular, however much our economy might seem to be determined by the capricious whims of our so-called leaders, the economic health of South Africa is extremely dependant on economic power houses like the United States, the United Kingdom, and the rest of Europe. This is to say nothing of our close trade relationships with many African and Asian countries who are, in turn, highly-dependent themselves on Europe and America.
Take, for a start, the United Kingdom. While the recent election shock may have both somewhat allayed some of the fears of the UK wholly embracing isolation, it also brought plenty of uncertainty along with it. In particular, negotiations for the UK’s leaving the European Union will presumably have already begun in earnest by the time this article sees print and these negotiations won’t just determine the state of the United Kingdom for generations, but may well reshape the EU and the entire world economy in the process.
At this point, I should point out that I feel far out of my depth here so I turned to a few people who know far, far more about economics, investment, and finance than I do.
To start off, by a remarkable coincidence (if you believe in such things), in the middle of my writing this article, Last Week Tonight with John Oliver did a typically hilarious, but immaculately researched and in-depth look at Brexit and what it means both economically and politically for the UK, and the rest of the world. In particular, Oliver and his army of researchers spelled out the difference between a “soft Brexit” and a “hard Brexit”, a difference that is crucial to understanding the precise ramifications of the Brexit negotiations.
Here’s the gist. A “hard Brexit” means that the UK will cut itself off economically from the rest of the EU and all trade and financial ties between Britain and the EU will be reconfigured. Where once the UK and the EU were part of a single market, with open borders between them, a “hard” Brexit would create stricter border controls and the UK and the EU would trade according to the world trade organisation rules that currently exist between the EU and other countries. A “soft Brexit”, on the other hand, will keep much of the current system still in play.
To elaborate, Kamilla Kaplan, an economist at Investec, explains that the current trade deal between the UK and the EU provide both with a number of major advantages. Along with tariff-free trade that exists between all members of the European Union, passporting rights exist between different members of the EU that, in brief, allows a company or financial provider set up in one European country to set up a branch in and work freely from any other country in the EU. The UK, being the economic powerhouse that it is, houses many multinational corporations and financial institutions that would very likely pull out of the country if a “harder” Brexit comes into play.
Brexit, of any sort, is effectively an attempt to secure the borders of the UK from foreigners and would free the British economy from supporting economically weaker EU members like Greece, but, as Kaplan further points out, such a move will bring with it major economic repercussions – something we have already seen with the weakening of the pound since the initial Brexit vote and something that will no doubt ramp up once Brexit goes from being an abstract idea to an implementable action.
Obviously, the “softer” the Brexit, the better, but, though May’s embarrassing loss in the election means that the UK itself may well push for a less hard-line exit from the EU, the Union itself may very likely try to “punish” the UK as a way of preventing other countries from following suit – something that may well have happened with France. Further, as Kaplan again notes, it’s certainly likely that the other members of the EU are not going to stand for what is an undeniable hypocrisy of Britain wanting to keep its borders closed to people from other countries in the European Union, but happy to leave those borders open for their money.
Losing the UK will undeniably be an economic hit to the EU but, by all reckoning, Brexit will most probably hurt the UK a lot more – especially if you factor in the strain that Brexit would place on the already strained relationship between Great Britain and the Republic of Ireland; to say nothing of Scotland potentially choosing to secede from the rest of the UK – which they have already come perilously close to doing well before the rest of the United Kingdom decided to purposefully cut them off from the rest of Europe.
What Does All This Have to Do With Us Again?
Brexit is, to be very clear about this, not just an intellectual curiosity to those of us living in South Africa. The precise way it will affect South Africans directly will, according to Philip Bradford, Head of Investment at Sasfin Wealth, only really be clear years from now – comparing the situation to the possibly apocryphal story of how when the notorious Chairman Mao Zedong was asked in the 1960s what he thought of the French Revolution, he replied that it’s still too early to tell. He does admit, however, that though this may apply to individuals and businesses who do not directly have anything to do with Britain, South African companies and multinationals that have strong direct ties to the UK will already be feeling the effects of a fallen pound – and will, no doubt, directly be affected by, say, the end of passporting rights in the UK.
For an economist like Kamilla Kaplan, however, there are things that are already clear. For a start, the UK remains one of South Africa’s most important economic partners. Though the UK makes up some 4% of South Africa’s trade, it makes up a staggering 34% of all investment into South Africa. Their largest contributions are foreign direct investments – as per Investopedia.com: “an investment made by a company or individual in one country in business interests in another country, in the form of either establishing business operations or acquiring business assets in the other country, such as ownership or controlling interest in a foreign company” – and portfolios (the buying and selling of shares and equities).
Kaplan predicts that the UK may well face a recession once Brexit goes through and, if that were to happen, the effects on the South African economy would be made very clear, very quickly. A United Kingdom in recession means that they would have less money to buy and trade portfolios and their foreign direct investments would take a hit too. Further, because the UK has strong economic ties with countries in Asia and Africa with whom South Africa has major trade relations, we would feel the very real effects on that level too.
The world being as tumultuous as it is, none of this is guaranteed by any stretch of the imagination, but South Africans should be wary of what’s to come with Brexit – especially those with direct ties to the country.
Meanwhile, Across the Pond…
Speaking of tumultuous, all the uncertainty around Brexit is nothing in comparison to the horrifying/exciting/hilarious (delete according to political affiliation) roller coaster ride that is the Donald Trump presidency. Both Kamilla Kaplan and Philip Bradford agree that what should have been a clear upswing in the markets thanks to Republicans taking charge in the US – Republican policy has long been derided by liberals for, to put it kindly, ignoring the average worker, but their tax-cuts to major corporations inevitably has a positive effect on US and global markets – but the sheer unpredictability of Donald Trump and his administration put paid to that fairly quickly.
Between this unpredictability and the fact that, unlike South Africa, the US economy is actually seldom affected all that much by the erratic behaviours of its president – though we are clearly in uncharted water here – it is incredibly difficult to guess even the short term effects of what the current state of the US will have on South Africa. As we saw in the all-too-recent past, a full-on recession in America would inevitably hit South Africa fairly hard, but anything less than that has to deal with the fact that the ties between the USA and South Africa are nowhere near as strong as those between South Africa and the UK.
While the United States is responsible for double the trade of the United Kingdom out of South Africa, its financial channels are less significant at 26%, of which most of it is portfolio investment rather than direct foreign investments. The one area that is particularly worrying, though, is in Trump’s policies of economic isolation from the rest of the world – trade protectionism, to use the precise vernacular – could mean increased tariffs between the US and some of our biggest trading partners like China or India, which inevitably will seriously hurt South Africa in the process.
Like the rise of populism in Europe that has still failed to make much of an impact on the EU’s economy (according to Kaplan, it would take a far larger populist movement to really shift Europe’s economy), the populist rise of Donald Trump hasn’t made the obvious impact on the US economy that one might expect. Will that be true a year, a month, a week from now? Who on earth knows?
But then, not to put too careless a point on it, regardless of how unpredictable, strange, or just plain mad the world at large may be, the monetary, economic, and financial systems that have been in place for decades, no – centuries, seem to be about as capricious, volatile, and transient as ever – but no more likely to fail. Whatever the impact of Trump, Brexit, populism, or anything else may be, we can at least take (admittedly perverse) comfort in that.
