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Brexit can increase Foreign Debt – analysts

Brexit can increase Foreign Debt – analysts

The UK on 23rd June 2016 voted in a referendum on the country’s EU membership, and 51.9 percent of voters chose the option of leaving the EU, frequently referred to as ‘Brexit’. This development sent many currencies around the globe tumbling against the US Dollar and the local currency experienced one of the weakest episodes in many years.
The Economist earlier this week gauged different professional opinions as to what could be the possible impact of this move on Namibia from different financial and economic analysts.
Mr Suta Kavari, chairperson of the Economic Association of Namibia has written extensively on the subject and postulates that the impact of ‘Brexit’ on African economies, and Namibia’s, is not quite clear cut and is hard to assess at this stage. But the uncertainty regarding Britain’s future trading relationship with the EU will feed into financial market volatility.
Most African economies will be directly impacted through currency movements and volatility. The Rand, for instance, was the worst performing currency in the immediate aftermath of the Brexit vote, as investors dumped riskier assets and piled into ‘safe-haven’ assets such as the US dollar, Kavari detailed.
He explained that the major post-Brexit risks are the spill-over effect of depreciating currencies on African economies with foreign currency denominated debt. A depreciating currency increases servicing costs of debt (the interest the government pays for debt), and affects total debt holdings if the foreign currency denominated portion is unhedged. The Rand, and by extension the Namibia Dollar, and most other emerging market currencies, have started recouping most of their Brexit-induced losses.” We are not of the view that Namibia’s debt holdings will increase on the back of a rebounding Rand.” he said. In contrast to this, Mally Likukela, Standard Bank’s Manager of Economic and Market Research said that the Eurobond continues to dominate the external debt portfolio as it accounted for 68.1 percent, and dominates Namibia’s external debt profile. “Government’s external debt stood at N$27.5 billion at the end of the fourth quarter of 2015/16, which is 16.6 percent of gross domestic product (GDP). This is the portion of the government’s debt that was borrowed from foreign lenders, which could include commercial banks, governments or international financial institutions.” Likulela argued.
He predicts that given this debt structure, it follows that any further weakening in the local currency translates into an increase in the debt stock when converted into the denominated currency.”Large debt servicing obligations and debt burdens can depress investment, and hence economic growth through its illiquidity and disincentive effects.” he said.
Nameni Kalili, an economic analyst from FNB, shares the same sentiments and saying that global growth is expected to be lower by 0.2 to 0.5 percent through downward revisions to both the UK and EU economies. For Namibia, the Brexit implications will in all likelihood trickle down to the export sector and most notably the beef and grape exports marketed through the UK.
He further explained that although the shock to global GDP is limited for the next two years, the implications of the resulting slower global growth additionally would erode investment growth in the domestic economy.
Kalili lastly added “Despite the plethora of global headwinds, we remain cautiously optimistic about the medium-term outlook for Namibia.
The economy should eventually benefit from infrastructure upgrades and greater commodity production capacity.”

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