Business

What Brexit means for the Nigerian economy?

 

By  Lukman Otunuga

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.
It will be unwise for investors to rule off 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 unfavourable 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 an 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.
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 in 2018 with total trade roughly $5 billion.
In 2018, Nigeria exported £2.23 billion worth of crude 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.
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.
During the second quarter of 2019, Jeremy Hunt, Britain’s foreign
minister 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.
*Otunuga is a senior research analyst at FXTM

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