How the Iran War Affects South African Consumers

The price of oil is the biggest worry for analysts commenting on the economic implications of the turmoil in the Middle East. US President Donald Trump’s reassurances on Monday 9 March to quell rising panic about oil brought the crude oil futures price down below $90 per barrel after it surged to nearly $120 last week, but vital questions and fears linger.

For South Africans, the geopolitical events of the past two weeks have dampened the positive expectations for the country generated in part by the Finance Minister’s consumer-friendly Budget Speech at the end of February.

On Monday, according to Trading Economics, President Trump signaled that the war with Iran may be nearing its end and announced measures to relieve pressure on the world’s oil supply, including lifting oil-related sanctions on certain countries and escorting tankers through the Strait of Hormuz, where shipping came to a standstill. Adding to the relief, G7 finance ministers meeting online on Monday said the group “stands ready” to release oil from strategic reserves if necessary.

Many commentators remain unconvinced that there will be a clean end to the war, and several South African economists and analysts are concerned about what a prolonged higher oil price could do to the economy and to consumers’ pockets. 

First, some observations from Sri Lankan strategist and author Shanaka Anslem Perera on the disruption of the world’s oil supply. In a Substack article, “The Invisible Siege: How Insurance Markets, not Missiles, Closed the Strait of Hormuz”, Perera says the reason the tankers are not running is because the insurers insuring these massive vessels have withdrawn their cover … and that cover will not be restored soon, even if the war ends tomorrow. “A military blockade ends when the military operation ends,” he says. “An actuarial blockade ends when the insurance market decides it has ended.”

In other words, the insurers will only reinstate cover when they can confidently assess and price the risks, and that may not happen for many months, “even under a favourable scenario”.

A higher oil price for a prolonged period is likely to have a multitude of knock-on effects for South Africa’s economy. Economist John Loos says not only is there a direct impact on how much consumers pay for fuel domestically, but fuel prices are a major input right down the supply chain, so with some lag it feeds through into the prices of other consumer goods. “Many products may thus experience higher price inflation as a result, leading to a higher consumer price inflation rate overall, and that eats into disposable income. It then goes further to a possible third important impact, because the South African Reserve Bank has a 3% inflation target. Should an oil price shock lead to a noticeable rise in consumer price inflation, the SARB could possibly start to hike interest rates, which would further eat into disposable income,” Loos says.

Chief Economist at PSG Financial Services, Johann Els, says that oil accounts for roughly 18% of the country’s imports, meaning that a sustained rise in crude would feed through into domestic fuel costs and, in turn, the broader cost of doing business.

“The key downside risk is a significant escalation of the war, particularly if major oil supply disruptions occur. That said, there is strong global economic and political incentive to prevent a prolonged disruption. Major oil consumers, central banks, and key producers all have an interest in avoiding a sustained price spike that could derail fragile global growth,” he says.

On the positive side, Els argues that South Africa is now in a considerably stronger position to withstand global shocks than a few years ago, thanks to a combination of policy adjustments and market-driven improvements. He also points out that stronger gold and platinum group metal prices can have several stabilising effects, including supporting export earnings and helping cushion the current account, thereby partially offsetting higher oil import costs.

On the effects of the crisis on the rand/dollar exchange rate, Izak Odendaal, Chief Investment Strategist at Symmetry, says the US dollar typically strengthens in times of stress. “The rand’s fall last week, for instance, was very typical. The softer rand in turn compounds the increase in the dollar price of oil,” he says.

Odendaal says the economic and financial market effects of this crisis will depend largely on how long it lasts, and that is unknowable at this stage. 

“It is unnerving for investors, also because it is yet another signal that the geopolitical order as we knew it for many decades, is over. Nonetheless, trying to time the market around these sorts of events – this is not the first and surely not the last – is likely to do more harm than good, since good news might be days away, or it could take months. No one knows. The most sensible approach now is to remain patient and let diversification do its magic,” Odendaal concludes.