Africa-Press – South-Africa. The shocks to South Africa’s economy from the US-Israeli war could take up to two years to work through the system as elevated oil prices push inflation higher and instability reigns.
While oil prices can come down significantly and the rand may strengthen, they are unlikely to return to their pre-war levels quickly.
For that to happen, there needs to first be evidence of increased oil supply from the Middle East reaching global markets on a sustained basis and a practical peace that can last.
Efficient Group chief economist Dawie Roodt explained in a social media post that even if this were to happen, investors will not return to emerging market assets overnight.
Roodt also noted that the existing ceasefire appears unlikely to last, with various actors giving conflicting messages regarding the end of hostilities.
There has also not been any permanent peace deal signed between the United States and Iran, with talks between the countries falling through in the past few days.
This uncertainty alone is enough to extend the initial impact of the war into the medium term and deepen its effects in the South African economy.
Roodt explained that the longer the war and uncertainty drag on, the more entrenched the inflationary impact becomes and thus, the longer it will last.
“Unfortunately, I don’t think we are going to go back to life as it was two months or so ago, because the shock is already in the system,” Roodt said.
“It can take up to two years for all these disruptions to work their way through the economy, prolonging the impact.”
This is roughly a similar time frame to the impact the Russian invasion of Ukraine had on commodity markets and inflation, the effects of which only began to be unwound meaningfully in 2024, two years after the invasion.
Old Mutual Investment Group portfolio manager Meryl Pick explained that this is largely due to global insurance markets, which can take months to adapt to a changing situation.
Insurance for oil tankers is crucial for their passage across the oceans, with multiple layers required before a ship can pick up its cargo and set sail.
The conflict in the Middle East has greatly disrupted the normal functioning of this market, with insurance being withdrawn completely in some cases and premiums surging across the board.
Pick explained that in the aftermath of the full-scale Russian invasion of Ukraine, insurance markets took several months to normalise.
Similarly, other disruptions to the maritime insurance market require extended stretches of calm before underwriters are prepared to return at scale and at commercially viable rates.
“For the Strait of Hormuz, the hurdle may be even higher. Insurers are unlikely to rely solely on political assurances or temporary de-escalation,” Pick said.
“Instead, they may require verifiable, on-the-ground measures, such as mine clearance, secure naval oversight, and credible guarantees of safe passage. These do not materialise overnight.”
Pick said that because of this, there is likely to be a substantial lag between a resolution to the conflict and the restoration of oil flows from the Middle East.
The inflationary shock
Reserve Bank Governor Lesetja Kganyago
The immediate shock has come in the form of elevated petrol and diesel prices, which naturally filter into the cost of other goods in the economy.
However, just how much they affect the prices of other goods depends primarily on how sustained elevated oil prices are.
If the impact is short and sharp, companies will likely absorb the price shock, meaning the prices of other goods in the economy are unlikely to be substantially affected.
In contrast, if oil prices remain elevated for a significant period of time, other prices in the economy will begin to rise, entrenching inflation.
Symmetry chief investment strategist Izak Odendaal explained that this is what the Reserve Bank will be watching closely, as it is a scenario the bank wants to avoid.
Inflation becoming entrenched means it will be more difficult to bring it back in line with the Reserve Bank’s target, and thus have a larger negative impact on the economy.
Odendaal estimated that fuel price inflation will accelerate to around 16% in April, once the hike is reflected. Crucially, fuel prices have a relatively small weighting in the Consumer Price Index (CPI).
Fuel’s direct weight in the CPI basket is only 3.8%, meaning that it will directly add between 0.6 and 1 percentage point to headline inflation in April, if current price hikes hold.
The government’s relief in the form of a reduced General Fuel Levy will help contain the inflationary impact, as it offsets some of the expected price hike.
However, inflation is still likely to move beyond the Reserve Bank’s one percentage point tolerance band around the 3% target, potentially forcing it into action.
Odendaal explained that companies are likely to take the current price shock in stride and not immediately pass on costs to consumers.
However, over the next few months, they will have to begin passing these costs on, and thus inflation will spread throughout the economy.
Of crucial importance for South Africa is its natural energy stores in the form of coal, which is used to generate the majority of electricity in the country.
South Africa is a net oil importer, but is not a net energy importer thanks to its coal deposits. This will help limit the impact of the oil price shock.
The country also exports a lot of coal, which has seen an increase in price amid the energy shock from the Middle East. This will boost South Africa’s balance of payments and support the rand somewhat.
While the impact of the war in Iran will be severe on South Africa, affecting fuel prices, inflation, and interest rates, the country is getting off relatively lightly compared to others.
Countries that are hit the hardest are those that are net energy importers and reliant on fossil fuels sourced elsewhere to keep the lights on.
This exposes them much more significantly to the conflict in the Middle East as energy imports effectively power their entire economies. This is not the case in South Africa.
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