The upheaval in Eastern Europe threatens to upend the world order and the immediate prospect for South Africans, weary after two years of Covid lockdowns and restrictions, is even higher food and fuel prices.
Still, Russia’s invasion of Ukraine could also yield opportunities for some sectors, and deliver another windfall to government coffers.
National Treasury director-general Dondo Mogajane said this week that the situation in Ukraine is a concern and that the assumptions about the global economy that were contained in last week’s budget have gone “out of the window”.
“We have to relook at the price of oil, the type of financial market conditions that we are seeing now, and what that will mean for the amounts that we have to borrow and what it will mean for global financial flows,” Mogajane said at a post-budget briefing hosted by Deloitte Africa.
In the 2022 budget, presented in parliament on February 23, the Treasury estimated that local growth would average 1.8% in the next three years.
But the war in Ukraine has seen oil prices rise to within a whisker of $120 a barrel — a level last seen in 2013 — amid fears of supply disruptions that are bound to affect the local economy should they prove sustained.
Izak Odendaal, an investment strategist at Old Mutual Multi-Managers, said global food and oil prices have already increased sharply. “As a result, the petrol price is very likely to increase again next month unless the situation changes dramatically. Similarly, we should expect higher food prices.”
Motorists are already digging deep into their pockets after the petrol price rose by R1.46 a litre on Wednesday to above R20.
Prices of some food staples have also risen. According to the Pietermaritzburg Economic Justice & Dignity Group’s latest household affordability index, consumers paid R146.90 for 5l of cooking oil in February, up from R108.53 a year earlier.
Annual consumer price inflation moderated to 5.7% in January from 5.9% in December 2021, according to the latest data from Stats SA. However, food and nonalcoholic beverages are among the main components in the basket of goods used to calculate prices, and the recent spikes are bound to be reflected in coming months.
Independent economist Thabi Leoka said that should the war escalate into a global conflict, there are likely to be currency ramifications, which will translate into even more inflation.
“We are going to see interest rates rise as a result,” Leoka said.
Ukraine accounts for about 30% of SA’s wheat imports. “In my understanding, you contract into the forward market, so now you have to scramble for another market at another price that is typically unfavourable because of the timing that is also going to impact the cost of wheat versus the cost of wheat we received from Ukraine,” Leoka said.
The Black Sea conflict heavily increases the risks to SA’s wheat imports
— Annabel Bishop
Wheat prices soared to the highest level since 2008 on growing fears of a global shortage as major ports in Ukraine — which accounts for more than 25% of the world’s exports of the staple — and other transport routes have been closed, Bloomberg reported on Friday.
Investec chief economist Annabel Bishop said with wheat prices soaring, and with Russia the world’s top exporter and Ukraine in the top five, "the Black Sea conflict heavily increases the risks to SA’s wheat imports, and with SA a wheat [and crude oil and petroleum] importer, this has limited the rand’s gain [against the dollar] so far,” she said.
On the other hand, Russia’s increasing economic isolation as a result of sanctions means the prices of palladium, platinum, coal and gold have risen. As a result, the fiscus may benefit from a tax windfall from mining companies.
SA accounts for 80% of global platinum production and more than 30% of palladium output. Russia is responsible for 14% of primary platinum supply and 44% of primary palladium supply.
Speaking at the company’s financial results this week, Exxaro Resources CEO Mxolisi Mgojo said he believes the conflict will trigger an energy crisis in Europe with downside risks to global economic activity.
If Europe needs to replace Russian coal volumes it will result in a price shock to the global market for the commodity and a shortage in Europe, Mgojo said. Russia accounts for more than 60% of European thermal coal imports, and Mgojo said the primary issue in seeking to replace Russian coal is the need to secure supplies of a similar high quality.
“For thermal coal markets, European coal-fired power plants that import Russian coal are designed to burn higher-quality products; we [SA producers] have the products, we just need to get it there,” he said.
Transnet’s logistical constraints resulted in Exxaro struggling to meet coal export targets in 2021.
Terence Corrigan, project manager at the South African Institute of Race Relations, said that despite the upside opportunity for coal and platinum, SA’s policy environment isn’t widely conducive to investment in mining.
“We had a commodity boom and our receipts shot up, but our actual output grew [only] mildly, we have not had exploration for years. If SA can get its internal act together, there could be advantages for us to exploit; that is, if we as a country and the government will act in a manner that will allow business and entrepreneurs to do so,” Corrigan said.
Andrew Bahlmann, CEO of corporate advisory firm Deal Leaders International, said: “If anything, it is possible that the sharp increase in interest rates in Russia — brought on by sanctions rather than a sovereign downgrade — could redirect some emerging-market investment to SA.”
FNB CEO Jacques Celliers said that while commodity prices are likely to remain elevated for a while longer and be supportive to the fiscus, there could be a spillover to inflation and fuel prices, and that could be a trigger for higher interest rates.
“Interest rate hikes might come at us a bit faster than we thought,” Celliers said.
- Additional reporting by Thabiso Mochiko
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