The invasion of Ukraine by Russia has sent shockwaves across the globe, causing significant uncertainty in global markets.
Although geographically far removed from these warring countries, the modern era of globalisation and fierce integration of markets through trade and financial flows means that South Africans will possibly feel the effect on their pockets.
Media outlets and news agencies have been rife with speculation since the start of the invasion, trying to determine the potential effects it may have on local economic conditions. Some analysts warn that a prolonged war may bring about fuel prices close to R40/per litre, which is one of the highest prices South Africans may have had to pay historically.
While these estimates may seem a bit excessive, the ongoing unrest in Ukraine/Russia does hold significant considerations for the local economy, especially when one considers the potential length of the invasion.
Among the most notable considerations is South Africa’s exposure to global oil prices. With many consumers still trying to adjust after the recent increase at the fuel pumps, the price of Brent crude has shown significant volatility since the end of February, increasing from $95 a barrel to highs of $128 (34,7% increase), with prices at the time of writing close to $100 (15 March). If the crisis continues, though, oil prices could exceed record highs experienced in 2007 at an estimated $140 per barrel.
As South Africa is a net importer of oil, this holds the biggest risk for local consumers. This risk is transmitted via supply shocks to the global system, especially since Russia contributes a significant amount (about 10%) of crude oil to the global oil supply. If these persist, South Africans can expect to pay record fuel prices in the near future. Most recent estimates suggest price increases of an additional R1 to R2,50 per litre as far as petrol is concerned, while diesel is expected to rise by even more as soon as next month.
The potential increase in the fuel price also holds potential downside risks for inflation levels (which are already close to the upper bound inflation target at 5,7%), particularly for food prices. According to official reports, an estimated 80% of South Africa’s grain is transported by road. It is therefore not surprising that food prices may increase significantly due to increased fuel prices as the producers pass these increases on to consumers, who are already feeling the pressure. Russia and Ukraine, although not considered to be major agricultural trading partners, are important sources of wheat imports (these two countries account for more than 25% of global wheat exports) for South Africa. This country could therefore also see an increase in bread prices, affecting the most vulnerable consumers severely.
Taking into account the above pressures, the response from the SARB is awaited eagerly. With the MPC announcing the start of its normalisation of interest rates with a hike of 25 basis points in January of this year, persistent inflation risks, fuelled by oil price increases, administered price increases such as electricity tariffs and possible higher wage demands may possibly more readily induce larger interest rate hikes at the upcoming MPC meetings. This would be despite the ongoing volatility in the global capital markets, which is causing a lot of uncertainty regarding the timing of this rate normalisation and its expected duration.
However, this is all dependent on the volatility of the rand. With both Ukraine and Russia forming a large part of the emerging-market currencies, the conflict may move investors away from the local currency. Despite these concerns, the rand has shown strong resilience against the major currencies since the end of February (dollar, euro and pound), improving from R15,35 to R15,11 against the dollar and from R17,20 to R16,53 against the euro at the close of market on Tuesday, 15 March. South Africa may also be cushioned by the stronger commodity price increases, which may prove beneficial for the current account. This may be good support for the rand’s value.
One thing is certain, though: the occurrence of war will dampen global growth outlooks and increase uncertainty, consequently affecting several of South Africa’s major trading partners, especially in Europe. This will spill over to the local recovery, delaying the much-needed return to pre-pandemic levels of economic activity. South African consumers need to brace themselves for the year ahead – it may prove really tough on already empty pockets, given the country’s continually rising unemployment rates by any standards and the worsening poverty levels.
