Irakli (00:02.2)

South Africa's rand is sitting on a fault line and the longer the US Iran war drags on, the harder the ground shakes underneath it. George Glynos joins us today from ETM analytics that have recently shared a sobering viewpoint this week that the risks to the South African rand have turned asymmetrical. Welcome George.

George Glynos (00:26.414)

Thank you, Irakli. Nice to meet with you.

Irakli (00:30.904)

So when we look at the Iran war and the Strait of Hormuz, the bigger picture is that it is a colossal hit according to a report, roughly three to four times bigger than previous oil disruptions on record. What does this mean for South Africa's Rand and how does it impact your viewpoint going forward?

George Glynos (00:54.151)

Yeah, so let's just paint that picture a little bit. The comparison that we were drawing was one to the oil hits that were experienced through the 1970s. In around about 73, you had the oil embargo. In 79, you had Iran, the Iranian revolution. In both cases, we had the impact removed somewhere in the region of 6 to 7%.

of the world's supply of oil. You compare that to this time around and you're talking about a hit of in excess of 20 odd percent of the world's impact and of the world's oil supply. And so it naturally has an outsized impact on oil markets. In this particular case, it's not just oil markets, it's the shipping market as well.

both on the logistics front as well as the oil front. You've obviously had a sharp rise in prices, which naturally has impacted inflation, et cetera, but it's done something else as well. It's also raised the level of risk aversion.

that the world is experiencing and so we started to see some fragility creeping into some of the stock markets which have run really hard this year and I think this is where I start to get a little bit concerned is that the impact of that on risk appetite more broadly speaking could have an outsized impact on emerging market flows and that's where it starts to roll back onto South Africa. So again,

Nothing specific that South Africa has done wrong, more of an external shock once again impacting. But if we're not careful and if we're a little bit too complacent in the way that we run our monetary and fiscal policy, the impact on the RAND could be obviously negative.

George Glynos (02:49.807)

and that spills over into a number of South Africa's asset prices, spills over into things like inflation and cost of living crisis, and that naturally impacts negatively on South Africa's ability to grow and supply jobs.

Irakli (03:08.014)

In the report, you mentioned the VIX, the global fear gauge, and you talk about how this impacts emerging markets. One of the key elements in your viewpoint is how there is this divergence, especially in terms of trade. Could you elaborate a bit further in terms of what that means with respect to South Africa's imports and exports and how that reflects on the rand?

George Glynos (03:31.867)

Yeah, so that divergence was quite specifically between South Africa's terms of trade and the performance of the RAND. So historically through the past few years, we've seen the two move in lockstep together. So quite clearly there has been an explanatory element to the movements in the terms of trade. If the terms of trade improved, so too did the RAND and vice versa, except that this time.

We've seen a big hit to the terms of trade, but the RAND hasn't yet responded. The only way you can really interpret this is one of two things. Investors are looking right through this and believe that this is going to be a short-lived and therefore not of any consequence and that will ultimately result in terms of trade improving once more and justifying where the RAND is trading. Or it tells us that the RAND is likely to feel increasing quantities of pressure as this war rolls on or as it drags on. And if it drags on a little bit too much and you start to see the real impact reflected in South Africa's trade accounts and its current account balance, then all of a sudden that pressure has to be relieved through a currency that depreciates to take those changes in the trade and current account balances into consideration.

So what we're doing, what we did in this piece was simply to highlight the point that South Africa's terms of trade have deteriorated sharply. They did so because the oil prices gone up and the goods that we tend to import like the refined fuels, etc. have gone up and yet the stuff that we export in the form of, for example, gold and platinum and a few other minerals, their prices through the course the past couple of months have gone down.

So you've had this double whammy on the terms of trade. The Rand hasn't responded strongly to it yet, which ultimately means that it is a little vulnerable. Should the shock extend, the greater likelihood, and that's why we speak about this asymmetry, the greater the likelihood that the Rand will come under some pressure.

Irakli (05:47.124)

Interesting. Thank you, George. As we look forward, we see the EIA is also predicting or estimating that the war will drag on longer than expected. Timelines they're extending beyond a month or so. What is the turning point that we will see in which this becomes tangible, perhaps in the market, a month, two months, three months in terms of the war dragging on?

George Glynos (06:15.005)

So if you have a look at the EIA, they initially released their estimates on the draws on inventories. And it looked like a very spiky chart. It spiked up. In other words, we drew a lot on those inventories and it came crashing straight back down again. They have revised that forecast. And all of a sudden, instead of rebuilding inventories from about August onwards,

That's been pushed out all the way to October, And so quite naturally, they're anticipating that there's going to be a continued draw on inventories through the course of the next few months. So that by their estimates, they're suggesting that, well, maybe this war drags on throughout June and possibly into July before we get a meaningful reversal of fortunes.

The problem that we have with all of this is that there's a finite amount of inventory. We can't keep drawing down on strategic buffers ad infinitum. At some point, the pain is going to become too great for the market to ignore. In other words, when we start drawing down on these inventories to a point where we start thinking and talking about scarcity, that is where financial markets start to become a little more stressed about the situation. For the time being

The supply that's been lost due to the blockages and the straits of Hormuz have been made up in part by the use of pipelines, Saudi using its east-west pipeline, UAE using its pipeline to the Fujairah port just off the coast of Oman. So they've been able to supply about 7 million of the 15, 16 million barrels per day that are being lost.

There's a bit of increased production coming out of America and Venezuela at the margin, a little bit more from Canada, but in the main, there is a big shortfall. That big shortfall has been funded out of draws of inventories, out of strategic reserves and otherwise. There's a finite limit to that. And if we start pushing this wall much beyond the end of June into July, I suspect that the narrative is going to change fairly significantly.

George Glynos (08:31.995)

not only because the world would have been dealing with much higher inflation and cost pressures, potentially higher interest rates as central banks respond, but also because we start creeping closer to that point where we can talk about real scarcity. There will be some countries like America that produces more than enough of its own oil that it doesn't necessarily rely on the rest of the world, but there are other countries, South Africa included.

where we import a tremendous amount of our refined fuels because our refining capacity has fallen off quite sharply. what we can refine, fortunately, we pull from the rest of Africa, Nigeria and a couple of other African countries.

We pull a fair amount of crude that we can refine, but our refining capacity is not there. So if we're not able to, at some point in the near future, being able to source that refined fuel from the Gulf, from the Persian Gulf, then all of a sudden, I think we're going to find ourselves in a more stressed environment. so, know, Gwede Mantashe has come out and said, you know, there's nothing to worry about here. We're fine.

we've sourced from elsewhere and I believe that they have increased sources from America, interestingly enough, despite our strained relations. If this goes on too long, the risk is that we suffer some sort of a scarcity issue and that's where I think you get a different kind of shock, which then potentially has vast implications for the economy. How mines run.

high energy sectors run, etc. Thankfully, we don't load shed in the way that we used to and so we don't consume, Eskom doesn't consume diesel the way that they did, but we still require diesel and fuel for logistics for transporting goods all around the country in a raft of different ways is that use.

George Glynos (10:42.967)

deployed. So we need this stuff urgently and that scarcity would be a big blow to South Africa and of course that could be one of the trigger points that pushes the rand substantially weaker.

Irakli (10:57.816)

Thank you, George. It sounds like either this war will end and the terms of trade improve to justify where the Rand is currently or it will depreciate, as you say, to reflect these effects on the trade balance. Thank you for joining us. This is Irakli from BizNews. Please do take a look at the article of the perfect storm gathering over the Rand on our website. Thank you, George, for joining us.

George Glynos (11:28.413)

Thank you.

The Rand's reckoning: George Glynos