Developing economies likely to be less affected by post-Brexit fallout, says KfW

The June 23 United Kingdom referendum that concluded in a vote demand the exit of the UK from the European Union is expected to have limited implications for the developing countries, but a noticeable impact on the beneficiaries of British development cooperation is expected to occur, KfW Research noted.

The impact of Brexit on European development policy will at least be as important as these direct impacts on bilateral British development cooperation. For European development cooperation, Brexit initially means that British funds will not be available in the future.

The United Kingdom also holds 16 percent of the shares in the European Investment Bank (EIB), and is one of the largest stockholders along with Germany, Italy and France. If the British withdraws from the EIB, only the UK’s own Development Finance Institution CDC will remain. However, it remains unclear whether the possible exit will pave a smoother way for closer co-operation within member states.

For developing countries, a distinction has to be made between real economic impacts and the reactions on the financial and capital markets. From an economic perspective, the main focus will be on the potential decline of demand for exports from developing countries due to the expected economic slowdown in the United Kingdom.

However, exports from developing countries account for only 0.5 percent of the former’s gross domestic product. Therefore, a decline in developing countries’ exports is likely to remain manageable and will only gradually become significant as demand in Europe will change slowly.

In addition, the economic downturn in the United Kingdom will also affect the rest of Europe, which might also be felt in developing countries. Also, financial and capital markets remain another important channel of impact; but true so for emerging market economies, and not for the poorer countries. Meanwhile, emerging markets with high external financing needs and high foreign debt in foreign currencies remain vulnerable to such capital market reactions.