Worry and scepticism surround the Brexit debate
The effects of the exit will trickle from the UK to Africa and beyond.
We look at the impact of Brexit on Africa’s construction industry
Shortly before the UK embarked on a voting process on whether to remain or depart from the European Union, construction players in Britain had cautioned against exiting the EU saying it will hit hard the housing sector that was already experiencing a crisis.
This was a genuine concern given that the UK construction industry is heavily reliant on its ability to access skilled foreign labour from the EU. This derives primarily from the fact that there are insufficient numbers of new and existing skilled workers entering the sector from the UK market.
Now that Brexit has become a reality, everyone is trying to come to terms with what the decision of the UK to leave EU really means. The reverberations of this move have been felt in the UK and further afield but it is yet to be determined how far reaching the effects will be.
The U.K maintains deep ties with many African countries, and the turbulence initially caused anxiety on the Johannesburg stock exchange in South Africa Africa’s powerhouse and there are fears that its effect would soon be felt on the construction sites in the rest of Africa. In fact, the impact of Brexit was felt immediately in South Africa with a steep drop in the value of the Rand. Although the currency quickly recovered from the shock, jitters remain.
Mr Joe Collins, a Director with African Supplies Limited a leading UK based company supplying products and services to the construction industry in Africa feels that Africa has greater things to worry about than Brexit given that already the continent is in the throes of an economic downturn given the fall in commodity prices. Collins says:
“There are greater influences impacting on African construction at the moment and these are related to declines in government revenue across much of sub-Saharan Africa and subsequent government expenditure. These are predominantly driven by the fall in values across the commodity sectors. The impact on GDP growth in the region is quite dramatic and if the construction sector is a barometer of the state of an economy, declines in new construction of up to 40% do not bode well”.
It’s for the better
However, Frans Pienaar – Chairman of Inyatsi Construction Group in South Africa is of the opinion that Africa stands to gain more than to lose following Brexit. Pienaar says that the UK may now deepen its ties with African countries. This he believes will result in more and more projects funded by the UK in Africa. For South Africans working in the UK, the Inyatsi Construction Group Chairman thinks most of them may be forced to return home.
Collins feels a weaker pound will improve Britain’s export competitiveness in the African market. “There are some potential scenarios that may or may not come to pass. The immediate fall in sterling value of course makes British products more competitive. With small exceptions, there are few UK made products that have widespread distribution, but perhaps there is now more of an opportunity.”
There seems to be widespread concern from South Africans in the UK that they may be forced to leave, although there is no evidence for this. Most of the South Africans brought with them significant skills when they entered the UK and the need will still remain.
In the event that skilled South Africans construction workers decide to return home, then this would be a major boost for the industry that has over the years been affected by brain drain.
Concerning the fear that projects in Africa may stall due to funding problems, Pienaar offers that this might only be a short-term problem. According to Pienaar, while most African countries stand to feel the effects of Brexit, French speaking countries will be least hit.
Pienaar concludes – “Any impact on Africa’s construction industry will be a wait and see affair. It is too early to pre-empt what the future of the industry looks like.”
Collins agrees that the effect on UK development aid on the other hand has yet to be seen. If the UK economy fails to grow because of Brexit, then pressure will be put on the government to reduce development aid. In 2016, the Department for International Development (DfID) had a budget of £11 Billion, much of which directed towards projects in Africa.
Currently, development aid to South Africa is worth £19 Million per year. Support has recently focused on supporting businesses, and reducing the maternal mortality rate. Pretoria reacted angrily when DfID announced a decision to phase out aid, describing it as a unilateral announcement that was tantamount to redefining the relationship.
Construction materials sourced from Europe and the UK will face turbulence because of price caused by exchange rate fluctuations. It is a view that is largely shared by Daniel Kuyoh a financial analyst at Alpha Africa a leading asset management firm in Kenya. He says that in the short term, there may be no major shifts within the construction sector as a whole, but some construction materials that are sourced from the UK or Europe could have a shift in pricing which could affect the overall cost of building projects
The effect on project costs will be limited however, because over the last couple of decades Africa has shifted to China and the Asian market as a source of construction materials as its principle source.
“We have been cushioned by the facts that we have limited construction projects being funded by the UK and the EU,” says James Mugerwa – Managing Director of Shelter Afrique, a pan-African financial institution that supports the housing sector in Africa. Mugerwa says that largely Africa’s construction industry is likely to remain stable owing to the fact that most construction materials are imported from Asian countries like China. However, he is quick to point out that owing to the deep ties between UK and African states, Brexit would likely affect projects financed by the UK
In its 2013 report, global consultancy firm Ernst & Young showed that the UK remains the leading financier of major projects in Africa. Total projects then stood at 104, with construction and hospitality making up a fifth of those projects.
“We are not entirely insulated,” cautions Mugerwa. It remains to be seen whether UK will halt financial support to construction and other development projects in Kenya.
There is a general feeling that projects funded by the EU could be affected. “According to the Brookings Institute, Britain is a large contributor to the European Development Fund, the EU’s development assistance arm, which provides funds to developing countries and regions. It currently contributes US$ 585 Million — making up 14.8 percent of contributions to the fund.
On the other side, these contributions could be channelled directly to countries that Britain enjoys cordial relationships with. Countries like Nigeria, South Africa, Kenya, and Egypt would greatly benefit in the event that this happens.
Still, in the event that Britain economy plummets due to Brexit, countries with deep ties with the UK are likely to feel the pinch of the exit.
According to Mugerwa, at the top of the list is South Africa. This is because some major companies in the country are listed both in Johannesburg and London. In fact, The South African Rand fell sharply as the news of Brexit trickled in. Nigeria will not be spared either; Brexit comes when the country is floating its currency. Inflows of Foreign Direct Investment into the country will likely reduce affecting efforts to liberalize its currency.
Kenya will take a hit as well because the UK is one of the top destinations for Kenyan Cut flowers. According to a report by Quartz Africa, Kenya is already suffering from capital flight and if the proposed trade deals with the EU and EAC stalls, the country could lose up to US$40 Million a month. This in turn is likely to affect infrastructure construction projects that the country is helping to finance.
“Several African countries will be affected, but those with ties with the UK will take the lion’s share of the Brexit economic setbacks,” discloses Mugerwa.
Perhaps the real people immediately affected by Brexit are importers of construction equipment and related material. For Amos Kibaru – Director of Floor Deco Kenya Limited – the effects have started trickling in. Floor Deco Kenya imports flooring products from Belgium, a country that is part of the EU. The firm is now contemplating abandoning the UK market due to a possible hike in tariffs.
“We used to ship our products to the UK for consolidation before shipping them to Kenya but with a Brexit we are now left with one choice: to abandon the UK as a transit route,” says Kibaru.
He adds that although the effects of Brexit have not been felt in earnest, the exit will likely affect the turnaround time for imported goods from the EU. “With a British exit, we are worried that we may not deliver goods to clients at a stipulated time. The UK was a really important transit route for us,”
At the end of the day, what will really be the decider will be the direction the European Union and the UK economies will take. Weaker currencies will mean cheaper imports of machinery and materials from Europe. Kibaru agrees saying “The cost of importing construction products will depend on two variables: the strength of the Euro and the tariff situation.
“If the Euro weakens then it means that we will import products cheaply. On the other hand if the tariffs are too high, the cost of importation will increase significantly,” he offers. Ultimately, the consumer will have to bear the brunt of a British exit.
For sure, the Brexit decision and what it bodes for Africa is still unclear and the only thing that is certain is the uncertainty as to what Europe and the UK will do next as regards to trade with Africa, which will have an impact on local economies, and by extension the construction sector.