As international conflicts gain momentum, what’s the risk to SA’s economy?

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JEREMY MAGGS: The outbreak of military conflict in the Middle East is likely to increase the risk of higher inflation, as well as deal a blow to global economic confidence. Along with the ongoing conflict in Ukraine, where does this leave an already fragile South African economy?

Annabel Bishop is the chief economist at Investec. Annabel, how do you anticipate that this conflict is going to affect South Africa’s already, as I mentioned, fragile economic condition?

ANNABEL BISHOP: Hi, yes, Jeremy. So the conflict in the Middle East obviously has a few factors. South Africa is far removed from the Middle East, so one would not anticipate there being much impact. But, of course, one needs to bear in mind that the rand is an emerging market currency, and, of course, we’ve already seen extreme financial market risk over the past 18 months. Really since, after …

This has really resulted in substantial rand weakness. If you look at a year ago, more than a year ago, if you look at the first quarter of last year, we actually saw the rand at 14.50 to the US dollar and it’s come closer to R20 to the US dollar this year.

So a lot of that’s been as a consequence of higher interest rates globally. It’s been as a consequence of [bearish] sentiment in financial markets.

This risk aversion obviously has caused weakness also in commodities and that has added to the rand’s weakness as a commodity currency. So you can see there’s obviously an indirect impact. If the war in the Middle East obviously grows, if more countries become involved, then obviously we find ourselves likely seeing more risk aversion in global financial markets and, again, they can have a negative impact on the rand and on other asset classes that are also affected by sentiment, such as equities.

JEREMY MAGGS: Annabel, given our reliance on oil imports, how could disruptions in the Middle East influence prices and overall inflation?

Read: IMF warns of inflation’s tenacity, weaker global growth in 2024

ANNABEL BISHOP: Yes, quite interestingly, we actually did see in 1973 when there was the Arab-Israeli War, we actually saw a halt to oil exports to the US from the Middle East. Now we know that the United States gets most of its oil from Canada, about two-thirds, and then in distant second place from Mexico. So there has been a reorganisation of where countries get their oil.

Jeremy, remember with the advent of the Russian-Ukraine war last year, we also saw pressure come through in terms of where oil and gas came from, it’s coming from Russia, also affecting the prices and affecting Western countries. So that’s obviously a risk.

Now for South Africa, we do get quite a lot of our oil from Nigeria and from other countries in Africa. But, of course, what is key is the Brent crude oil price and that is the oil price that our petroleum products are priced against. If you think about our petrol and our diesel, and that typically faces upward pressure. So there are some concerns.

Read/listen: Oil price bounces amid Middle East tensions

We’ve already seen a modest uptick in oil prices on Monday, and that obviously is reflective of worries in the markets as a consequence of the conflict in the Middle East that has arisen. Now obviously looking forwards, we don’t know how long this will persist, whether it’ll broaden and the risk then, one of the key factors would be oil prices, and I think in that type of environment we could easily see oil go into $100 a barrel, if not more. It just depends how wide the conflict moves to, how disruptive it is.

Read: What oil watchers have to say about impact of Hamas’ attacks

I don’t think it’s anticipated at the moment, so you’re not seeing expectations being built into oil prices but there is that risk and I think markets are already jumpy. We’ve seen an environment where interest rates are now likely to stay higher for longer coming through from monetary policy communication from the United States in terms of its Fed Funds Rate and that’s likely to influence monetary policy around the world.

Higher interest rates for longer means a longer time to get to interest rate cuts, which of course is negative for global economic growth.

So that’s obviously creating some risk off in financial markets and if we do see significantly higher oil prices, that then will translate through into higher inflation, supporting the higher for longer narrative on interest rates, and you can see how that risk-off environment persists.

JEREMY MAGGS: Annabel, you rightly say that we are far from the epicentre of both conflicts, Ukraine and the Middle East, but it also points out to us, doesn’t it, in stark reality that we are hostage often to global economic interdependency?

ANNABEL BISHOP: Yes, Jeremy, you’re quite right. We are a very small open economy and while we do export a lot in terms of commodities, that typically tends to be food, bulk commodities, minerals. We import all our petroleum products, oil, and that obviously places us at great risk in terms of what happens internationally.

If the oil price were to shoot up towards $150 a barrel, for example, there’d be enormous pain on consumers in South Africa.

The worry would also be the second round of effects in terms of transport costs and the impact on the rand. So all of these factors do mean that a worsening of the conflict in the Middle East does have a negative impact on South Africa’s economy, on financial markets globally.

Really, I think there has been disappointment that the interest rate cut cycle is likely to be pushed out quite substantially now and obviously risks now going up from other areas as well that we’ve discussed.

JEREMY MAGGS: Annabel, we don’t know how long this conflict in Israel and in the Gaza Strip is going to last, but inevitably if it is protracted, there will be a potential long-term impact, not only on South Africa, but in the region. That is also something that policymakers need to keep a close eye on.

ANNABEL BISHOP: I think you are quite right, Jeremy. It very much comes down to how many other countries get involved and does the US become involved as well. We were already talking about risks of a third world war when we were discussing the Russian-Ukraine conflict in March last year, and worries that if other countries who were Nato [North Atlantic Treaty Organisation] members did support Ukraine directly or obviously they’ve been giving indirect support through ammunition and arms, but also if Russia were to attack one of those Nato members directly, then you’d find yourself devolving into a type of third world war scenario. I think there are some risks around this situation as well.

I don’t think that the risks are seen as quite as extreme as they were when discussion was going on around that topic with the Russian-Ukraine war.

But it doesn’t really mean that it’s not a worry because this situation can quickly ramp up and get a lot worse. I think that’s what people are very concerned about.

We’ve seen rapidity with the attacks on Israel over the weekend and we’ve obviously seen Israel’s rapid response. If we do see other countries getting involved and we do see oil sanctions starting to come into play, that then obviously puts us in a very different type of environment.

JEREMY MAGGS: Annabel Bishop from Investec, thank you very much.