Fresh scramble to avert pain for SA as Middle East conflict continues

The recent escalation of the conflict in the Middle East could see some South African industries scrambling to avert another disastrous run, and economists are split on who should come to the rescue.

Brent crude oil reached triple digits again this week, for the first time since July, after Iran and the US struck tankers in the biggest wave of attacks on shipping since the war began.

The fighting has renewed concerns about prolonged disruptions to oil supply.

Read: SA economy shrinks, snapping six-quarter growth streak

On Thursday, the global benchmark tracked above $102 per barrel. This is at least 7% higher than it was three months ago when US President Donald Trump signalled a possible ceasefire.

The impact on the South African economy was felt in the second quarter, with GDP contracting 0.2% compared to the revised 0.4% growth in the prior quarter.

Econometrix director and chief economist Azar Jammine spoke to Moneyweb, saying: “Unfortunately, we have seen a deterioration in economic prospects compared with what prevailed at the beginning of the year and this is because of the US-Iran war and the fact that it is continuing for much longer than President Trump led us to believe would be the case.

“This means inflation is going to turn out to be quite a bit higher than we anticipated and we could well now see one or even two more interest rate hikes to try and quell those inflationary pressures and South Africa will find it hard to achieve economic growth much above 1%.”

Read: SA’s 3% inflation goal is robust, Sarb study shows

In addition to the affected sectors, possible higher inflation, and the higher interest rates that could follow, Jammine said the erosion of disposable income for households will continue to be a sore point.

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This will also potentially see a slowdown in the growth of sectors closely linked to consumption, such as retail.

The worst is yet to come …

If early data from the Central Energy Fund (CEF) is anything to go by, then another horror show at the pumps is pending.

According to the CEF’s estimates, petrol and diesel prices for October could hit new records.

Both grades of petrol are currently at an underrecovery of between R1.81 and R1.93 per litre, with diesel at between R1.73 and R2.03 per litre.

At current market conditions, this could push fuel to prices not seen before.

Read:
Diesel surges to over R31/l in historic price reset
Diesel reprieve short-lived as prices increase by more than R1/l in August
Inflation threat as diesel prices shoot up more than 11% from today

Jammine doesn’t believe government is in any position to reinstate aid to pull prices down for motorists (and farmers who previously bore the brunt of the Middle East conflict).

“I don’t think the government can really afford to step in to save South African consumers. There will be backlash if it uses government funding to try and save consumers.

“I think people just need to bear the brunt and suffer the consequences of America having elected President Trump to lead that country for the next few years.”

Political economist Dale McKinley has a different view. He told Moneyweb that government still has tools it can use, as it did when Finance Minister Enoch Godongwana and Minister of Mineral and Petroleum Resources Gwede Mantashe agreed on a temporary reduction in the general fuel levy.

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The three-month long intervention cost the fiscus at least R17 billion in foregone tax revenue.

Read:
Govt slashes levy on diesel to zero, as it extends fuel relief
Government cuts fuel levy by R3 to curb price shock

“I think the first one, as we do in emergency situations or unusual situations, is that subsidies can be provided to lessen the blow – and that would be for farmers, manufacturers,” said McKinley.

Doubling down on an issue that has been laboured all year, McKinley emphasised the need to strengthen South Africa’s industrial capacity in the long run.

“We used to be completely self-sufficient in fertiliser production and now that’s not the case,” he said.

Responding to a parliamentary question this week, Godongwana again dashed any hopes of an intervention – for now.

Read:
No further fuel levy relief, as Treasury rebalances books
Mantashe punts 60-day SA oil reserve policy

“Government cannot fully insulate consumers from a sustained increase in international oil prices, particularly as South Africa is a net importer of crude oil and petroleum products.

“Permanently offsetting these increases through the budget would ultimately shift the cost to taxpayers or increase government borrowing,” Godongwana wrote.

“Any further intervention would need to balance immediate relief to households and businesses against the severity and duration of the shock and available fiscal space, while preserving fiscal sustainability.”

AfDB steps in

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While the government is likely to hold back for now, the African Development Bank Group (AfDB) has stepped in with a continent-wide package worth a collective $5.1 billion (nearly R82 billion at the current exchange rate).

The regional multilateral institution, headquartered in Côte d’Ivoire, has approved a new framework to mitigate the impact of the global energy and fertiliser crisis on African countries, in response to the escalating conflict in the Middle East.

Read:
Spare a thought for SA farmers
Fuel costs soar across Africa, governments race to respond

The Global Energy And Fertiliser Crisis Response Framework (GEFCRF), approved on 1 September, will enable the AfDB to deliver timely, targeted support to address the immediate needs stemming from the crisis and to strengthen African member countries against future shocks.

The framework will be financed through $4.1 billion in African Development Bank lending and up to $960 million from the African Development Fund, the bank’s concessional lending arm.

The response is temporary and valid for one year from the board’s approval date, after which it will be reviewed before extending.

“This framework is about listening and responding to the urgent needs of African countries, helping them protect households and vulnerable populations, keep food, fertiliser and energy systems functioning, and preserve hard-won development gains while building greater resilience for the future,” said Abdul Kamara, acting vice president for Country and Regional Operations.

“A crisis response must do more than cushion the shock. It must make countries stronger. That is exactly what this framework aims to achieve.”

The GEFCRF will work across four main pillars to:

Stabilise macroeconomic conditions by providing rapid counter-cyclical financing, short-term buffers, and coordinated fiscal, monetary, and debt policy responses during shocks.
Secure critical food, energy and fertiliser supply systems by using emergency and trade finance to protect food, energy, and fertiliser supplies.
Protect essential spending and vulnerable households by safeguarding priority public expenditures and deploying targeted social protection to cushion vulnerable groups.
Sustain reforms for medium to long-term resilience building: Policy space preserved for medium-term reforms that reduce dependence on volatile external energy, food and fertiliser markets.

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