FNB’s massive international fear for South Africa
FNB says that the escalation of conflicts into the Middle East poses severe risks to its South African outlook.
It has been over a year since the conflict between Israel and Hamas broke out in Gaza.
Instead of a ceasefire that many had hoped for, the conflict has only expanded.
Israel has started a ground offensive in Lebanon, while Iran launched airstrikes on Israel.
The world is now waiting to see how Israel responds to Iran’s attack, with fears that it could target the nation’s oil or nuclear infrastructure.
Targeting Iran’s oil could remove nearly 2 million barrels per day (mbpd) from the global oil supply.
FNB’s economists noted that spare capacity from OPEC countries, primarily Saudi Arabia, would likely be able to bridge the gap.
That said, there are corners that other areas could be affected by an escalation in the conflict.
Using historical data, World Bank estimates show that most oil supply could be affected by between 0.5 and 8 Mbps per day, with the worst-case scenario potentially leading to a 75% price increase.
FNB said that major disruptions could be relevant as OPEC’s spare capacity may not be readily available.
This would be the case if the Strait of Hormuz between the Persian Gulf and the Gulf of Oman were affected, but this is not considered likely.
“Another important caveat is that the impact on oil prices and inflation depends on the starting point and how much risk premium has already been added to market prices,” said FNB.
“Current trends suggest that a major oil disruption could drive global inflation higher than baseline projections by approximately one percentage point.”
In South Africa, a $10 increase in oil prices could add roughly 0.5ppts to headline CPI, given the 4.82% weight of petrol.
This is based purely on a direct fuel impact, and there would likely be second-round effects.
The South African Reserve Bank’s Quarterly Projection Model shows that a 10% increase in fuel prices could increase food inflation by 0.4ppts and core inflation by 0.2-0.3ppts in a year.
“In total, such an impact would potentially result in nearly 0.7ppts added to headline inflation over a year,” said FNB.
“The impact would be compounded by a weaker rand as risk sentiment worsens. This would result in less interest rate cuts over the medium term.”
Inflation reached 4.4% in August and the SARB expects further declines in the coming months, allowing it to continue cutting rates after cutting the repo rate by 25 basis points in its latest meeting.
FNB said that the government could intervene by not renouncing the general fuel levy, as it did in 2022, to reduce its impact on inflation.
That said, the adverse spillover to fiscal policy could mean that macroeconomic stability leans more on monetary policy.
“Ultimately, this risk is pertinent to our expectation that inflation will remain below 4.5% over the next year and interest rates will be cut in increments of 25bps until the May 2025 monetary policy meeting,” said FNB.
“While we witness the Middle East conflict unfold, it is important to keep such risks in mind.”
Petrol prices
A weaker rand and rising global oil prices have recently diminished petrol and diesel price cuts expected in November.
The latest data from the Central Energy Fund (CEF) suggests a small cut of between 15 and 23 cents per litre for petrol and around 10 cents per litre for diesel.
This is down massively from the 80 cents per litre cuts projected just a week ago.
Not a concern for all
Despite FNB’s fears, Maarten Ackerman, Chief Economist at Citadel, was less concerned about the conflict.
Ackerman said that the conflict in the Middle East will likely not have nearly the same inflationary effect that followed Russia’s invasion of Ukraine in 2022.
Although oil prices have recently increased, the upward trend began before the latest escalation and is still far lower than it was a year ago ($90 per barrel in October 2023 to $78 per barrel today).
Ackerman said that markets have already expected the increase’s escalation, with analysts predicting such events last year.
In addition, Ukraine is a significant exporter of barley, corn, and wheat, while Russia is a world-leading supplier of crude oil, petroleum products, and natural gas.
“In contrast, the Middle East conflict does not present the same level of global commodity risk,” said Ackerman.
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