Johann Els | Chief Economist | PSG Financial Services | mail me |
The recent escalation in the Middle East has reintroduced a geopolitical risk premium into global markets. Investors now price in the risk of supply disruptions and wider regional instability. This shift reflects growing uncertainty linked to the Middle East conflict.
For South Africa, the transmission channel mainly operates through oil prices rather than direct trade exposure. The country is not a major exporter to the Gulf region. In addition, it has limited investment linkages to the affected economies. Therefore, the Middle East conflict will influence the economy primarily through imported fuel costs, inflation and the external balance. It will likely affect these areas more than the balance sheets of South African companies or banks.
Oil prices – the key risk channel
For South Africa, the main economic impact of the conflict will likely emerge through higher oil prices.
Oil accounts for roughly 18% of the country’s imports. As a result, a sustained rise in crude prices would increase domestic fuel costs. In turn, this increase would raise the broader cost of doing business. This dynamic illustrates how the Middle East conflict can transmit economic pressure through energy markets.
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Fuel price pressure
Higher crude prices push up the petrol and diesel benchmark price. Consequently, transport, logistics and distribution costs increase. Consumer-facing sectors also feel the pressure. As a result, households and corporates experience what effectively feels like an added “tax”. This effect becomes stronger if elevated prices persist for several months.
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Impact on headline inflation
Fuel plays an important role in transport and many services. Therefore, higher oil prices tend to lift headline inflation. This effect can occur even when underlying inflation pressures moderate. As a result, inflation could move closer to, or even exceed, the South African Reserve Bank’s upper target band. Developments linked to the Middle East conflict could therefore influence the short-term inflation path.
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Trade balance effects
Rising oil import costs can weaken the trade balance. This effect becomes more visible when export volumes grow slowly. Consequently, the current account balance can deteriorate. In addition, the Rand may face short-term pressure.
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Monetary policy implications
Higher inflation expectations can complicate monetary policy decisions. At the same time, a weaker exchange rate can amplify these pressures. In such circumstances, the South African Reserve Bank may adopt a more cautious approach to interest-rate cuts. This cautious stance may persist even if economic growth remains modest.
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Offset from higher OPEC production
Higher OPEC output could ease some upward pressure on oil prices. Several Gulf producers have already signalled a willingness to increase supply if necessary. Consequently, additional supply could limit the magnitude and duration of any price spike. However, this stabilising effect depends on the trajectory of the Middle East conflict. A severe escalation could still disrupt key shipping routes such as the Strait of Hormuz.
That said, higher OPEC production still provides an important counterbalance. Several Gulf producers have signalled their willingness to increase output if needed. As a result, additional supply could reduce both the scale and duration of price spikes. However, this stabilising effect would weaken if the Middle East conflict escalates significantly and disrupts key shipping chokepoints such as the Strait of Hormuz.
The important offset – strong commodity prices
The economic impact of the conflict is not entirely negative. In fact, elevated geopolitical tension often supports gold and other precious metals. These commodities form an important part of South Africa’s export basket.
Gold is particularly sensitive to safe-haven demand during periods of uncertainty. Meanwhile, platinum group metals (PGMs) often respond to shifts in global risk sentiment and industrial cycle expectations. As a result, developments related to the Middle East conflict can indirectly support South African export revenues.
Stronger gold and PGM prices can produce several stabilising effects:
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Support export earnings
Higher rand-denominated export prices for gold and PGMs increase mining revenue. In addition, these higher revenues indirectly boost tax receipts for the fiscus. Consequently, stronger commodity prices help cushion the economy against more expensive oil imports.
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Help cushion the current account
Improved terms of trade can strengthen the current account balance. This occurs when export prices rise faster than import costs. As a result, the economy becomes less vulnerable to external funding shocks.
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Partially offset by higher oil import costs
In effect, the economy benefits from a partial automatic stabiliser. Higher revenues from key exports help mitigate the impact of rising fuel import costs.
This terms-of-trade buffer reduces the overall macroeconomic impact on South Africa. Without this buffer, the economic consequences of the Middle East conflict would likely be more severe. The economy would face greater vulnerability if commodity prices were weak or declining.
Risks and likely path
The most significant downside risk involves a major escalation of the conflict. In particular, disruptions to global oil supply could create severe economic consequences. For example, attacks on export infrastructure or key shipping routes could significantly reduce supply.
In such a scenario, oil prices could rise sharply. Higher energy costs would place additional pressure on inflation. They would also reduce real household incomes and compress corporate profit margins. Consequently, economic growth would likely weaken more noticeably. This outcome would represent a more severe transmission of the Middle East conflict into the global economy. However, strong incentives exist to avoid such an outcome.
Major oil consumers, central banks, and key producers all share an interest in preventing prolonged supply disruptions. A sustained oil price spike could undermine already fragile global growth conditions. Therefore, a more probable base-case scenario emerges.
Historical market behaviour suggests that geopolitical shocks often create short-term volatility. However, these shocks rarely produce prolonged disruptions. Consequently, the most likely path is that the Middle East conflict remains relatively contained. Under this scenario, oil prices would gradually ease as tensions decline and supply conditions stabilise.
South Africa is better positioned
South Africa now occupies a stronger position to absorb global shocks than it did several years ago. A combination of policy adjustments and market-driven improvements has strengthened the macroeconomic framework.
Fiscal consolidation has played a central role in restoring credibility. Policymakers have implemented measures to stabilise the debt-to-GDP ratio. They have also worked to reduce the primary fiscal deficit. As a result, long-term expectations have become more stable. These steps have improved investor confidence and lowered the risk of sudden funding crises.
Public debt growth has slowed. In addition, the government’s medium-term fiscal framework now appears more credible than during the period of intense fiscal stress after 2020. Consequently, policymakers have greater flexibility to respond to shocks without undermining market confidence.
Inflation expectations have also become better anchored. Following the sharp spike after COVID-19, both headline and core inflation have moderated. At the same time, the South African Reserve Bank has maintained a credible inflation-targeting framework. This framework reinforces confidence that inflationary pressures will remain contained, even if the Middle East conflict temporarily raises energy prices.
Furthermore, the external position has become more balanced. The current account deficit has narrowed as mining exports have remained relatively strong. At the same time, imports have moderated. As a result, the economy now faces less vulnerability to sudden capital flow reversals. This improvement also supports a more stable currency outlook.
In conclusion
Although higher oil prices could temporarily lift inflation, the macroeconomic framework is now more resilient than in previous episodes of geopolitical stress linked to the Middle East conflict. Some near-term inflation pressure remains possible, especially if oil prices stay elevated. However, any delay in interest-rate cuts would likely be tactical rather than structural.
Historically, geopolitical shocks tend to generate market volatility rather than lasting economic damage. Initial reactions are often sharp, but markets typically stabilise as uncertainty fades. Over time, outcomes often prove less severe than investors initially fear.
