The South African rand has come under further pressure as global markets react to rising geopolitical tensions and surging oil prices, which are pushing investors away from emerging-market currencies.
According to Investec chief economist Annabel Bishop, the latest escalation in the Middle East has triggered sharp movements in energy markets and financial assets, hitting the rand particularly hard.
“The oil price has spiked again, reaching US$106/bbl for Brent crude as escalating market risk aversion drove the rand near R17.00/USD, while risky assets in general have seen some sell-off,” Bishop said.
Tensions have intensified after missile strikes in parts of the Gulf region, raising fears of wider retaliation across neighbouring countries.
The conflict has also drawn in global powers, increasing uncertainty about the stability of key energy supply routes.
Concerns have centred on the strategic Strait of Hormuz, through which a large portion of the world’s oil supply passes.
“Concerns are that the oil supply interruption from the war will be greater than the stockpiled reserves, limiting but not preventing the escalation in oil prices globally,” she said.
While markets still view the conflict as short-lived, the price spike is already feeding through to South Africa’s fuel outlook and inflation expectations.
“The petrol price under recovery has risen to R4.27 per litre for April, a hefty price jump that would add around 1.0% year-on-year to South Africa’s inflation rate in that month,” Bishop said.
South Africa adjusts fuel prices on the first Wednesday of each month based largely on the previous month’s rand-based petroleum product costs.
The impact could be even more severe for diesel, a critical input for industry and transport.
“The diesel price is estimated now to rise by R7.04 per litre in April,” Bishop said, noting that diesel plays a key role in the country’s industrial production.
Markets still expect war to be short-lived
Higher fuel costs are likely to ripple through the economy, raising both consumer and producer inflation.
“The impact will still be very significant on inflation, and for producer price inflation, second-round effects are very substantial from large jumps in the diesel price, which in turn feeds into CPI inflation too and weakens GDP growth,” Bishop explained.
She added that although South Africa has some protection because taxes and levies make up roughly half of the fuel price, the overall effect will still be noticeable.
“About 50% of the fuel price in South Africa is taxes and levies, typically adjusted once a year, which means large swings in international petroleum product prices in rands only affect around half the fuel price, providing some buffer,” she said.
Globally, rising energy costs are also shifting investor sentiment and dampening market growth expectations.
According to the S&P Global Investment Manager Index, the outlook has deteriorated as investors become increasingly cautious.
“The prospect of weaker economic growth in the short-term is accompanied by concerns over inflation due to higher energy prices,” Bishop said, citing the index.
As a result, investors have scaled back expectations of policy support and reduced the anticipated benefits for equity markets.
“The darkening political and macro environment, and pullback in expectations of policy support, has led to a downgrading of any expected benefit to the market from equity fundamentals and shareholder returns over the next month,” Bishop said.
In the near term, markets are repositioning towards defensive sectors, including energy, healthcare, utilities and consumer staples.
However, Bishop noted that markets are still largely assuming the conflict will be brief.
