The recent escalation in the United States/Israeli war with Iran has now injected new urgency into assessing the economic and business implications for countries like South Africa.
Prof. Raymond Parsons, economist of the North-West University (NWU) Business School, says with the Brent crude oil price opening at over $100 a barrel this week, the Middle East conflict is widely seen as becoming increasingly protracted.
“As expectations of a swift end to the fighting recede, so the future price of oil is expected to rise further. We know that the longer the Middle East crisis continues, the greater the economic impact on heavily oil-dependent economies like South Africa will be through higher transportation costs and other supply-chain disruptions.”
According to Prof. Parsons, the latest developments confirm that the Strait of Hormuz remains the biggest single bottleneck to the free flow of shipping, as well as being a decisive factor now driving both military and market considerations.
“If the strait is closed for a long period, market experts believe the global oil price may surge to $150 a barrel. Fortunately, much of the crude oil used in South Africa is sourced from West Africa, but the domestic economy is not immune from the much higher global oil price levels now likely to prevail.”
He says in the expectation of an imminent price shock, the Central Energy Fund is already projecting a substantial rise in both petrol and diesel prices per litre on 1 April. Fertiliser costs are also rising for agriculture and transport cost increases will permeate other sectors of the economy. Air fares have risen.
“It is therefore not good news for either the inflation outlook of the country or growth prospects at a hitherto otherwise favourable turning point in the South African business cycle. As the economy experiences a severe supply-side shock the economic pain is inevitable.”
According to Prof. Parsons, the key to coping successfully with a negative external shock is nonetheless a realistic understanding of the problem and a willingness to make hard choices. To deal effectively with the situation now requires a more coordinated policy response and better communication.
“There is no need for a doomsday scenario. South Africa does have economic buffers and an available layer of resilience with which to manage these strong global headwinds. The economy also gains from the concomitant boost in the prices of precious metals, such as gold and platinum. The shipping now likely to be rerouted around South Africa is also a positive development, although the anticipated 100% increase in traffic, if realised, would be a serious challenge to the existing limited port infrastructure of the country. But there are also no grounds for complacency.”
Prof. Parsons explains that as a small, open and highly oil-dependent economy, South Africa will now need to address the major economic vulnerabilities that exist. First, the country as a whole must not fail to grasp the seriousness of the new economic challenges South Africa is facing as the global energy situation deteriorates. It also converges at a moment when substantial rises in Eskom tariffs are soon pending, with negative implications for disposable income. It is now unlikely that the Monetary Policy Committee of the South African Reserve Bank will continue its interest rate-easing cycle at its meeting on 26 March. Second, the nation must be seen to be steadily mobilised behind whatever policies and measures are required to ameliorate the global shock, or be prepared to eventually adjust to it economically, if it becomes a long haul.
Prof. Parsons says on the positive side, the government and the South African Reserve Bank have both already been monitoring recent developments in the Middle East and have acknowledged the risks to the South African economy. The government has also selectively indicated what initial steps it may want to take to address likely rises in costs and other supply-chain disruptions, as well as to minimise and cushion any setback to the growth prospects of South Africa in 2026.
“However, details are still lacking as to what exactly is being contemplated, or what is being implemented as the outlook changes. This overall information is now important to promote public understanding and confidence, and to secure balanced decision-making in coping with the new international energy situation.”
Prof. Parsons says coping involves finding not the best solutions, but those that are good enough. Yet these official plans have so far gained little traction in the public domain, partly owing to their ad hoc nature, partly because of a lack of coordination in implementation, and partly due to inadequate communication. Uncertainty is elevated if governments are perceived to be reactive rather than proactive.
“Official risk assessments and contingency plans now need to be also aligned with what is happening in business sectors that are already beginning to experience the economic fall-out from the conflict. There are a number of existing structures where this interaction can usefully occur. The presidential Investment Conference on 31 March will no doubt also discuss global developments and their implications for the investment community. An action-oriented agenda would range from issues such as an update on the role the strategic oil reserves of South Africa, to how the poor can be shielded against higher living costs, and whether the higher fuel levy and carbon taxes also intended for implementation on 1 April could be postponed for, say, three months. There are precedents for temporarily easing the fuel levy.”
Prof. Parsons believes interventions should be targeted at mitigating the situation, rather than at broad subsidies. He says a visible “game plan” of appropriately designed support measures would help to soften the immediate shock to the economy. It would also buy time in the face of the persistent uncertainties that still need to unravel in the months ahead.
“South Africa must not fall behind the curve. Countries like India and Australia have recently already publicly announced comprehensive plans and dedicated resources for dealing with the inevitable impact of the Middle East saga on their economies. South Africa now also needs a more systematic way of dealing with these imminent challenges.”
He says South Africa therefore ought to move to the next level soon of consolidating its policies and measures into an overall realistic, integrated and well-communicated approach that strengthens public confidence at a critical juncture.
“The escalating Middle East crisis has already generated highly elevated levels of uncertainty about future global energy markets. South Africa nonetheless needs to understand what various options are now open to its economy, and what can realistically be done about them. Whatever remedies the government is contemplating should now be embodied in a cohesive national statement or programme that clarifies and coordinates policies, communicates them effectively, and forces the decisions that may now be needed. In present circumstances economic preparedness and clear communication are as important as the policies themselves.”
