South Africa’s rand is among emerging-market currencies most vulnerable to upheaval if Britain votes to leave the European Union, while rouble investors may find some benefit from the isolation provided by sanctions on Russia.
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 UK banks, compiled by analysts at UniCredit. British lenders’ claims on entities in South Africa amount to 178% of the country’s foreign-currency reserves. For Russia, with already-weak links to Britain curbed further by US and European restrictions since 2014, the exposure is 3%.
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. UK banks may then shore up defences 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 UK 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 rouble versus the rand.
The UniCredit analysis uses data from the Bank for International Settlements tracking assets and liabilities of banks within economies.
The rand rose 0.2% against the dollar and the rouble climbed 0.5% in London last week.
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 UK is Turkey’s second-largest and Poland’s third-most important export market, shipping more than $10bn from each in 2015. Britain was the fourth-biggest destination for South Africa’s exports last year, amounting to $5.8bn, 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 in London. The impact would be spread across several countries with limited effect on each one, they said.