By Irene Ngabirano…
On June 23, the United Kingdom (UK) voted to leave the European Union (EU) in a non-binding advisory referendum, which resulted in the resignation of UK Prime Minister David Cameron and is likely to trigger fresh elections later this year or in 2017. Despite pressure from some EU countries, it is unlikely that exit negotiations will begin until a new UK government is firmly in place. There is a possibility that the next UK government will not trigger exit negotiations at all, based on a legal technicality or if it calls a second referendum.
Regardless of the probability of an eventual UK exit from the EU, the referendum result has caused market turmoil across the world, as investors worry that the result of the UK vote could drive fresh momentum to anti-establishment movements in other European countries, including East Africa, a region with a strong British colonial legacy, which must feel “blow back” from Brexit. For example, Global stocks lost USD2 trillion in value on 24 June and sterling fell to a 31 year low.
UK companies and banks were some of the worst affected, with USD55 billion wiped off banking stocks. The price of commodities also fell, with the price of oil dropping 3.9% to USD50 per barrel. However, the price of gold gained 4.7% as a reflection of investors’ perception of gold as a safe haven. Undeniably, further riveting economic, political and social repercussions will begin to unfold overtime, but keenly, let’s look at Oil &Gas sector in our Region of East Africa, and Uganda in particular.
Oil Background; Uganda has proven oil reserves in excess of 6.5 billion barrels, of which about 2.2 billion barrels are recoverable. The country plans to build a refinery in the Western Region to process what is needed locally and regionally, with the rest exported via pipeline to the Indian Ocean coast. Uganda previously agreed to build a joint Uganda–Kenya Crude Oil Pipeline to the Kenyan port of Lamu But on the 13th Northern Corridor Heads of State Summit in Kampala in April 2016, Uganda officially announced its choice for the Tanzania route for its crude oil, in preference to the Mombasa or Lamu routes in Kenya.
The cost of the pipeline; It is expected that construction will start in August 2016 and last for three years at a budgeted cost of US$4 billion, the project is to be developed under a public-private partnership, and the private developers will have 60% of the stake. The remaining 40% shares would be distributed among the East African States. Tanzania agreed to buy 8% of the shares in the refinery for $150.4 million. Total E&P is prepared to spend the US$4 billion (UGX:13 trillion) to fund construction of this pipeline.
Ugandan markets were relatively stable, following the ‘Brexit’ vote, Bank of Uganda immediately resorted to selling off dollars to intervene in the market and stablise the economy. This is because the Brexit Vote caused panic among many investors who rushed to seek dollars, and then the depreciation of a shilling due to the decline of a pound by 30% estimate. It is likely that the UK would prioritise trade negotiations with Uganda, which could even benefit Uganda and other EAC members Although Ugandan officials were quick to respond the market turmoil followed by the UK’s vote to leave the EU.
The central bank also said it would be ready to intervene in money and foreign exchange markets if required. Such assurances steadied the impact on the Ugandan shilling, but some banking stocks still suffered losses. However, there is a risk of capital flight from Uganda as risk averse investors seek safe havens. This would weaken the shilling and increase import costs. Another key concern would be that ongoing negotiations of a trade agreement between the EU and the East African Community (EAC) would be delayed as the EU copes with the UK’s departure.
On Oil & Gas sector, Oil prices are seeing a nascent recovery as a supply and demand imbalance shows signs of coming to an end. Demand at a global level is predicted to grow while supply weakens, supporting prices after two years of declines. Brexit or none, the combination of healthy demand and declining supply should result in a global market that will be roughly balanced in the second half of 2016. The long awaited re-balancing has been bullish for oil prices and it’s expected to continue until next year.
If there is a Brexit, the key takeaway is that the shift from an oversupplied to a balanced market will, in my view, overwhelm the small fundamental impact of slightly weaker demand due to currency effects. The bottom line? “The negative impact of a Brexit on oil prices would be driven by risk aversion, not fundamentals, The EAC, or Uganda, will also struggle to attract supporting investors aimed at financing its expansive budget for the newly discovered Oil activities like the proposed refinery;
The other major impact of a ‘Brexit’ on EAC and Uganda in particular would be further deterioration of the region’s already struggling economy, which has been caused by the fall in global oil prices and a steep drop in local crude production due to an insurgency in the region, . A slowing UK economy on the back of a departure from the EU and potential disruption as the UK renegotiates its trade agreements, would be likely to reduce trade flows, foreign direct investment, and Ugandan remittances.
In conclusion; The UK vote to leave the EU was based on a non-binding advisory referendum and does not guarantee the UK’s departure from the EU. However, months of political uncertainty throughout Europe will rattle global and African markets and this directly affects EAC in particular Uganda’s newly discovered treasure (Oil). However, if the UK does leave the EU, the impact on many African economies will be short-term and relatively insignificant. The UK will have two years to renegotiate trade agreements with African countries. Also, the effective implementation of a new foreign exchange mechanism and liberalization of the fuel sector will face fresh hurdles as the UK withdraws from the EU.
The writer is the managing director of IRENGA LTD
This Article was first Published by The New Vision