South Africa sailing into stormy seas

The Iran war has clouded the outlook for a South African economy that had entered its longest period of economic expansion since 2018, the South African Reserve Bank said.

“The buoyant performance of global and domestic financial markets over the past year was abruptly interrupted following the outbreak of the war,” the South African Reserve Bank said in its quarterly bulletin on Tuesday.

The subsequent rise in oil prices “is expected to exert significant upside pressure on domestic fuel prices in the coming months.”

The bank held its benchmark interest rate steady at 6.75% last week, but cautioned a prolonged conflict in the Persian Gulf may warrant hikes in coming months, with the scale of the policy response hinging on how long hostilities last.

Oil prices have surged more than 55% since the US and Israel attacked Iran on 28 February.

The central bank, whose quarterly bulletin mainly examined South Africa’s economic performance through the fourth quarter, said the impact of the conflict has yet to become apparent in the real economy.

“The obvious first impact will be the sharp rise in fuel prices, which might spillover to other prices, depending on the duration of the war and crude oil prices and exchange rate developments,” the bank said in response to emailed questions.

“At this stage, it is difficult to quantify the extent of the impact on real economic activity, other than that the spike in fuel prices is likely to reduce households’ disposable income for discretionary spending.”

The Department of Mineral and Petroleum Resources (DMPR) has announced the official petrol and diesel price increases that will take effect on 1 April. 

Petrol prices are set to rise by over R3 per litre, while diesel will surge by over R7 per litre. 

The conflict in the Middle East has seen oil supply from the region, which covers around 20% of all demand, effectively come to a standstill, bar a few pipelines that can circumvent the Strait of Hormuz. 

Iran has effectively closed this body of water to normal maritime traffic, cutting oil supply from crucial suppliers in the Persian Gulf. 

The DMPR noted that the average price for a barrel of Brent Crude oil rose from $69 in the previous period to $93.67 in the past month. 

This has been coupled with a weaker rand, which exaggerates the impact of the oil price shock by making it more expensive to import the commodity.