ONE doesn’t like to put the boot in, but we are used to having our currency trashed, our credit ratings downgraded, our capital inflows put at risk — and our national football team losing — in a way the Brits are not.
There’s been much excellent analysis in the wake of last week’s shock Brexit decision about what went wrong, but surely one of the reasons a majority of British voters ticked the Leave box on their referendum ballots, despite compelling evidence of how badly this would affect their economy, was that many couldn’t imagine a scenario in which the world — and global markets — turned against the UK.
True, many feel marginalised by globalisation and integration with Europe, and the voting patterns revealed the deep divides between London and the provinces; university graduates and others; young and old. But the UK has had an extraordinarily prosperous few decades since it joined the EU. GDP per capita has doubled since 1973, outpacing other affluent non-EU English-speaking countries. That’s according to the Organisation for Economic Co-operation and Development, which also estimates that immigrants — the people the Leave supporters felt so strongly about — have accounted for about half of GDP growth over the period.
If immigration were the one big issue driving the vote to leave, the other was a notion that Britain needed to regain the sovereignty and independence it used to have in those long ago pre-EU days. But there’s a big question raised by the pound’s crash to 30-year lows, the billions wiped off the value of UK pension funds, and the $3-trillion wiped off global markets since Friday. The question is whether any country now can claim to be fully sovereign and independently in charge, in an era in which not just markets or traders, but computer algorithms drive the prices of countries’ assets and their economic fortunes, at least to some extent.
SA has learned that, or should have done, through many currency crises. This time, the rand has been hit not just because it’s an emerging market currency or a commodity currency, but because it has been classed by markets as one of the currencies most exposed to the UK’s fortunes — along with eastern European currencies such as the Polish zloty.
There are real concerns out there that global markets could become “disorderly”, and that the impact of the UK’s decision could ripple across Europe and the world. There have to be concerns that SA’s ailing economic growth prospects will be further weakened by the Brexit fallout, both indirectly through the volatility in financial markets and directly through trade links. Nor is it any comfort to see another, much larger, stronger and faster-growing economy facing the swift wrath of the ratings agencies.
It is interesting, though, to compare and contrast. Since Friday’s result, Moody’s has put the UK on negative outlook. Fitch has downgraded it by one notch to double A, while S&P Global Ratings, which was the only one of the three that still had the UK on the highest possible triple A rating, has opted for an unprecedented double notch downgrade to double A with a negative outlook.
S&P has rated the UK uninterruptedly triple A since the inception of the ratings in the 1970s, so this is a huge step. A borderline investment grade rating such as SA’s triple B minus factors in a good deal of risk — a triple A rating allows for almost none, which is perhaps why S&P took such extreme action.
Interestingly, just as the ratings agencies’ SA comments have put institutional and political risks at the top of the list of concerns, so too is the case for the UK. In a conference call on the downgrade on Tuesday, S&P’s analysts said the UK’s triple A had always been supported by its institutional strength. In the aftermath of the referendum, it is no longer considered a strength, with S&P seeing “a less predictable, stable, and effective policy framework”. The agency is also worried about the deep divides in UK society that the referendum exposed, and flags as a major risk that the UK government may have to deal simultaneously with the complexities of negotiating itself out of the EU and Scotland out of the UK.
Then there are the risks to the UK’s external position. Like SA, it has a sizeable current account deficit; unlike in SA, this has been seen as a strength in that it reflects the global role of the City of London and the people wanting to do business there. However, if Brexit undermines that role, the UK is left hugely exposed because there is, on S&P’s metrics, no other sovereign with such a high funding requirement.
As emerging markets such as SA know to their cost, capital can and does move as global investors recalibrate risk and move their money elsewhere. Production can move too, and may well do if the UK ends up without access to the single EU market.
The markets are voting, and more volatility can be expected. But at least in the UK, when markets and voters protest a self-destructive decision, the prime minister resigns.
• Joffe is editor at large.