Tensions between the US and Iran as well as allies on either side of this equation have heightened, with concerns about the shape and form of the violent retribution promised by Tehran for the assassination of Major General Qassem Soleimani, the popular leader of Iran’s Quds Force of the Islamic Republican Guard Corps. The Middle East is wracked by conflict, while Iran’s revenge for the Donald Trump-approved killings could easily be played out elsewhere. South Africa seems far from the Baghdad airport where US drones took out Soleimani and his associates, designated as terrorists for their alleged roles in killing US military personnel and destabilising the region, as the world rung in 2020. But, the fall-out from the US-Iran stand-off is likely to contaminate the global economy, with worrying implications for South African efforts to boost growth. Econometrix chief economist Dr Azar Jammine examines possible scenarios and what might be in store for the country. – Jackie Cameron
By Azar Jammine*
Key points
- The implications for the South African economy of the latest stand-off between the United States and Iran following the US assassination of Iranian Army General Qassem Soleimani is unclear. In part this is because it is difficult to determine what the repercussions of this event will be on the global economy.
- Theoretically, if this leads to a surge in international oil prices, this could have negative implications for global economic activity and through this for the demand for South Africa’s raw materials. On the other hand, increased tensions have been causing precious metals prices to rise, helping to neutralise the negative impact of the increased cost of oil imports domestically.
- The uncertainty surrounding the implications of the latest global tensions is manifested in the volatility of the Rand and precious metals prices in the last few days. There is clearly still significant support for financial markets, and risk appetite for higher yielding emerging market assets and their currencies seems to be continuing.
- However, given the uncertainty surrounding which way the latest stand-off will pan out, it is fair to suggest that it could lead to significant volatility in financial markets and the Rand in coming months. The latter may still not be ready to depreciate immediately, but there is a meaningful risk of a significant sell-off in the Rand in coming months in the event of global risk appetite souring.
The latest stand-off between US and Iran does have the potential to escalate
The implications of the latest stand-off between the US and Iran following the elimination by the US of Iranian Army General Qassem Soleimani and some of his team, is unclear. The conventional view of likely repercussions is that Iran will retaliate in some fashion and the US will respond by attacking key Iranian installations. This does have the potential to escalate into a more serious conflict bearing in mind that Iran has now said that it is pulling back from respecting a deal reached two years ago between itself and Western powers to cease development of nuclear research (and potential development of nuclear weapons).
Iran is the major Shia Muslim power in the Middle East whereas its principal foe, namely Saudi Arabia, is the leading Sunni Muslim power and is supported by the United States. On the other hand, Iran tends to be supported by Russia and has cited Israel as its principal enemy. The principal concern about the economic implications of the latest stand-off is that it is seen as threatening to cause international oil prices to surge, which could have a dampening effect on global economic activity. Iran has the potential to produce up to 3.5m barrels of oil per day, equivalent to 3.5% of global demand and around 12% of OPEC supply.
Worse still, to the extent that it could threaten to close the Straits of Hormuz through which oil traffic from the Gulf region travels, it could disrupt up to 20% of global oil traffic.
Impact on South Africa’s economy likely to be indirect
South Africa’s direct trade relations with Iran are nowadays fairly limited. The country used to be a key source of oil supplies to South Africa, but following the decision four years ago by the US to impose sanctions on any country dealing with Iran, South Africa ceased purchasing its oil from Iran and switched to other sources such as Nigeria, which has become the country’s fifth largest source of imports.
It is therefore more in indirect ways that the repercussions of the latest tensions could reverberate onto the South African economy.
If global economic activity is negatively Implications for SA economy of stand-off between the US and Iran indirect and not clear-cut: makes for a scenario of volatility affected, this can result in the demand for commodities declining. To the extent that South Africa depends for more than half of its exports on commodities, a decline in commodity prices, especially of minerals, would have a negative impact on South Africa’s balance of trade, especially considering the fact that the one commodity whose price could escalate is that of oil, which is also the one commodity which South Africa imports in large quantities.
However, the situation is complicated by the fact that precious metals prices could benefit from these events by virtue of precious metals being seen as a safe haven at times of turmoil. In the past few days, this has become abundantly clear with the surge in the price of gold to its highest level in seven years and a rise in the price of palladium to record levels, with platinum following a similar upward trend.
Nonetheless even here, the outlook is clouded by the fact that if the ultimate impact of an escalation of conflict in the region leads to lower global economic growth, the industrial demand for precious metals could fall off to such an extent as to outweigh the increase in demand for investment purposes. Thus far, since the US attack on the Iranian convoy, the benefit potentially for the value of precious metals exports derived from higher precious metals prices has exceeded the increased cost of oil imports. South Africa’s precious metals exports as a whole amount to around 40% of South Africa’s exports whereas oil accounts for 30% of imports.
Impact on the Rand also fairly volatile
It was also fairly interesting to note last week how the Rand/Dollar exchange rate, which had appreciated to its best level in five months, suddenly lost 2 1/2% of its value in next to no time following the US attack. This was because of heightened risk aversion associated with increased uncertainty regarding the implications of the global conflict. Immediately, investors who had bought into risky emerging market assets such as South African government bonds, felt compelled to sell out of some of these assets and to move into the safety of the Dollar and gold.
However, one notes that the Rand has regained around half of its losses in the past day or two as the tensions surrounding the recent events have subsided somewhat. It is of course early days and the uncertainty surrounding the final outcome remains. The only conclusion that one can draw fairly definitively is that one is likely to see bouts of significant volatility in financial markets, including the Rand and the price of gold, in coming months, in the wake of statements made and actions taken by parties involved in the dispute with regard to how they intend dealing with each other.
Essentially it creates a new source of uncertainty in the world economy just at the time when some of the uncertainty surrounding international trade relations, especially between the US and China, seems to be dampening somewhat in expectation of the signing of a trade deal between the world’s superpowers on 15th January. There still appears to be a proclivity towards a positive mood for global financial markets driven by the abundance of liquidity being created by leading central banks to ward off any slowdown in global economic activity. More recently, China reduced the bank reserve requirements in the country to encourage banks to lend out money more easily.
New dynamic in oil market is US shale oil
It is also worth mentioning that there is a significant new dynamic in the international oil market at present which did not exist during previous oil crises. This is the rise in the importance of the US shale oil industry. This has ironically generated an era of stability in oil price expectations from a longer-term point of view. It has been shown that as soon as oil prices rise rapidly, the US shale oil industry, which is able to ramp up and down oil production from its facilities much more rapidly than is the case with traditional crude oil production, tends to be increased to such an extent as to limit the potential rise in oil prices.
Even so, it is also worth remembering that the price of Brent crude has risen by 20% in the past three months in Dollar terms, whereas the Rand has risen over this period by no more than 7%. This means that the underlying rent price of crude oil has indeed been in an upward trend in recent months and there is no evidence yet of that trend being reversed.
All we are suggesting is that it would be misleading to be dogmatic about the likelihood that oil prices might double or treble in the manner that they have done in previous oil crises. Equity markets have certainly not collapsed in the wake of recent events yet, suggesting that the abundance of liquidity created by central banks has been more than enough thus far to counterbalance the negativism regarding global economic prospects which might have followed the US attack.
- Azar Jammine is the chief economist at Econometrix.
