UK banks’ big exposure to SA: Rand to fall sharply if “Leave” wins Brexit

According to the latest analysis of potential knock-on effects, South Africa has more at stake in the Brexit vote than any other country outside of the UK. The substantial exposure of British bank lending to the SA market makes the Rand vulnerable to a potential sell-off should these institutions need to quickly bolster their reserves – a possible consequence should Britain vote next week to leave the European Union. On the other hand, despite a succession of opinion polls putting the “Leave” camp in front, the pricing of financial assets (and the betting market) clearly points to a “Remain” victory. It often pays to follow the money. Then again, the financial services sector will be impacted worst of any by Brexit. So having traders sell off in anticipation of an event that will hurt would be like expecting turkeys to vote for Christmas. Rather unlikely. This one is going down to the wire. – Alec Hogg

By Natasha Doff

(Bloomberg) — South Africa’s rand is among emerging-market currencies most vulnerable to upheaval if Britain votes to leave the European Union, while ruble investors may find some benefit from the isolation provided by sanctions on Russia.

South African Rands
South African Rands

That’s a possible conclusion to draw from a ranking of countries in central Europe and Africa based on the depth of their financial ties with U.K. banks, compiled by analysts at UniCredit SpA. British lenders’ claims on entities in South Africa amount to 178 percent of the country’s foreign-currency reserves. For Russia, with already-weak links to Britain curbed further by U.S. and European restrictions since 2014, the exposure is 3 percent.

This will matter if the British public vote to leave the 28-member bloc in a referendum on June 23, potentially unleashing a bout of financial volatility that economists predict may send the pound tumbling to a 30-year low. U.K. banks may then shore up defenses by calling in debts and holding back new lending. In South Africa, reliance on funding from Britain’s banks exceeds foreign-currency reserves, limiting the central bank’s ability to defend the rand.

“If there’s a shock and whatever is being lent from the U.K. to these countries were to be returned, that could lead to capital outflow and currency weakness,” said  Kiran Kowshik, a London-based emerging-markets strategist at UniCredit. Kowshik said he considers a vote to remain in the EU to be the most likely outcome though the analysis of financial exposure partly influenced a so-called long recommendation for the ruble versus the rand.

The UniCredit analysis uses data from the Bank for International Settlements tracking assets and liabilities of banks within economies.

Emerging-market investors, who have previously been more complacent on the referendum than their developing-world peers, are beginning to assess the risks of a so-called Brexit as the voting date nears and the latest opinion polls signal the campaign to leave is pulling ahead. Amundi Asset Management said this month it has reduced exposure to debt in central Europe, partly over threats to funding for the region from the potential exit of the third-biggest net contributor to the EU budget in 2014.

Another way a British exit could impact emerging-market economies is through disruptions to trade. The U.K. is Turkey’s second-largest and Poland’s third-most important export market, shipping more than $10 billion from each in 2015. Britain was the fourth-biggest destination for South Africa’s exports last year, amounting to $5.8 billion, according to data compiled by Bloomberg.

The effect of trade may not be so large even if a leave vote leads to a recession in Britain, according to analysts at Capital Economics Ltd. in London. The impact would be spread across several countries with limited effect on each one, they said. A U.K. exit may cause some disruption to global capital flows as investors pull funds from riskier assets, at least in the short term, the analysts, including Neil Shearing, said a note published June 10.

South Africa and Turkey have current-account shortfalls of more than 4 percent of national output, leaving them more susceptible to changes in investor sentiment because they depend on foreign funding to cover the deficit, data compiled by Bloomberg show.

“Brexit will lead to a knee-jerk selloff in risk,” said Kevin Daly, a money manager at Aberdeen Asset Management Plc in London, which oversees $11 billion of emerging-market debt. “It’s hard for us as emerging-market managers to be positioned for Brexit because you can’t really hide.”

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