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South African rand left exposed by US strike on Iran

By David Whitehouse
Posted on Wednesday, 8 January 2020 08:58, updated on Thursday, 9 January 2020 06:00

Iranians at the funeral for Iranian Major-General Qassem Soleimani, head of the elite Quds Force, and Iraqi militia commander Abu Mahdi al-Muhandis, who were killed in an air strike at Baghdad airport, in Tehran, Iran January 6, 2020. Official Khamenei website/Handout via Reuters.

The South African rand was among the financial market casualties of the US strike which killed Iran’s leading military commander General Qassem Suleimani in Baghdad on January 3.

The operation raises the prospect of heightened tensions or major conflict in the Middle East and increases the risks that Iran will seek to achieve nuclear weapons capability.

Greater economic uncertainty as a result of the US strike “certainly bodes ill for heightened currency risks in emerging markets, perhaps especially in Africa,” says Harry Broadman, chair of the emerging markets Practice at Berkeley Research Group LLC in Washington.

“There’s little question that a rise in world oil prices will dim the economic prospects of oil importing countries like South Africa,” Broadman says. “The rand could well be undermined.”

Iran alone lacks the capacity to seriously disrupt world oil markets, or supply to South Africa.

In May 2019, the main suppliers of South Africa’s oil imports were Nigeria, Saudi Arabia, the United Arab Emirates and Angola.

Charles Robertson, global chief economist at Renaissance Capital in London, says he’s “finding it quite hard to get with the mood” of the pessimistic market reaction to the assassination.

  • “Iran is as weak as it has been at any time since the 1980s, and its importance to global oil markets is smaller than it has ever been,” he says.
  • The only way that the impact is going to last more than a week or two is if Iran can disrupt Iraqi oil production, attack Saudi oil facilities or succeed in disrupting oil supplies through the Straits of Hormuz, Robertson argues.
  • “As it stands, I would not alter any forecasts for any country on the back of last week’s news.” By the end of the month, Robertson expects media attention to turn elsewhere.

Stock market impact

But the reduced role of Iran in global oil markets may be overlooked if there is a generalised retreat from risk assets. According to research from Kgotso Morema and Lumengo Bonga-Bonga at the University of Johannesburg in 2018, there is significant transmission of volatility in both the short and long term from oil prices to the South African stock market.

  • The researchers were surprised to find that oil price increases also have “an impact on business and consumer confidence, which will ultimately affect the demand for financial products and the financial sector.”

Any pressure from Iran to impede exports through the Strait of Hormuz would push the Ramaphosa administration towards seeking alternative oil exporters, says Indigo Ellis, head of Africa at Verisk Maplecroft in London.

  • She does not rule out a rise in fuel taxes on both South African petrol and diesel in April 2020 if the tensions worsen.
  • “Higher import prices for petroleum products will weigh heavily on state coffers as well as industry,” she says.
  • That’s unlikely to move alternative, renewable power sources far up the South African agenda.
  • Despite pressure from industry, “the political will to move away from fossil fuels is lacking, particularly from energy minister Gwede Mantashe,” Ellis says.
  •  “The rand will continue to bear the brunt of US-Iran tensions over the coming weeks.”

Bottom Line: Unless Middle East tensions serve as a weak-up call for a South African energy policy rethink, the country’s financial assets are likely to face more collateral damage.

 

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