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SIMON BROWN: I’m chatting now with Lullu Kruger, chief economist at PwC South Africa. Lullu, appreciate the early morning time. Some scenario plans have come out from you and your colleagues at PwC around the impact of the Iranian war on our economy. It is fast-moving.
We might be having peace in our time, or maybe we won’t. We are not sure. The point is that, almost regardless of how this plays out, there’s going to be impact – some of it short term, some of it potentially playing out over the next couple of months.
LULLU KRUGER: Good morning Simon. Yes, absolutely. I think if we look at what is happening to the oil price – yesterday it retreated after the comments that President Trump made – the reality is that, even if the conflict stops now or in the next couple of days, we’re not sure about the damage to some of the oil infrastructure.
Some of the Middle Eastern countries that are oil producers are at a stage where they basically have had to shut down production in a bunch of areas because they don’t have space to keep their oil reserves.
It’s a little like when you don’t have water in your pipes at home, and then you open it up, there’s air and – well, you know!
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SIMON BROWN: [Chuckling] I take your point.
LULLU KRUGER: But there are things in the pipes that we need to sort out. So even if, if that is immediately sorted out, I do not believe that the oil price will retreat any time soon to levels that we saw before the conflict, and we will probably sit with a couple of months of elevated oil prices, with a couple of months of elevated fertiliser prices.
I think that is going to have a large impact on our food production and then that knock-on effect of the higher fuel prices; that we will definitely see in April. That is going to happen.
So whether this is sorted out now or not, we will see the elevated fuel prices in April – up around R5/litre for petrol, around R8 for diesel.
I really do hope that government is reconsidering what they are going to do with the taxes – maybe delay that a bit. I know that that is a request that has gone to quite a few of them.
There are some offsets for us in South Africa if you look at gold and commodity prices and so on. But we’ve seen a very strange thing happening over the last couple of days with gold retreating quite a bit. Everybody was asking why that is happening. There’s all this uncertainty. But I think it’s the expectation of potentially higher interest rates driving people back into bonds and into US-denominated currency, et cetera.
Read/listen:
Gold on pace for record losing run as war hurts longtime haven
The Fog of War makes investment decisions tough
Treasury bets on export earnings from gold to offset higher oil imports
Gold, stock markets plunge as war in the Middle East escalates [20 March]
Oil shock: Brace for R5/l to over R8/l SA fuel spike
SIMON BROWN: Yes, because of course gold is a non-yielding asset. So when rates are going down that adds some attraction to gold. I take your point very much on, even if the war is over, the Brent price.
We were sub-$60/barrel for a brief period right at the beginning of the year, and fuel prices are going up.
You mentioned fertiliser because of course urea is a by-product of LNG [liquefied natural gas]. That comes through the straights as well. We are going to see inflation moving. The expectation around rate cuts is off the table. Is there a world in which the Sarb is going to start discussing rate increases?
LULLU KRUGER: Well, I think that will be on the table. Even now I think inflation risk and where it’s going and expectations will be driving their conversations today and tomorrow [at the Reserve Bank meeting this week]. And I think it’s really about how prolonged and how wide the impact will be.
We are at a point where we know it shouldn’t have happened in the first place, in my opinion. But it has been longer than I think most people anticipated…
There’s a lot more of the region that has been pulled into that conflict. So it’s [the Middle East conflict] already on a longer and wider scale than we initially anticipated.
So I think one of the key factors for the Sarb will be what inflation expectations are doing. The February inflation number, that 3%, was fantastic news. It put a discussion about a potential rate cut right back on the table.
But I do not think we will see any changes now. We will see them in a wait-and-see pattern. And probably, I don’t know, if this escalates and things get worse in May they might really consider whether we need to increase rates. But, in my opinion, probably another round of wait-and-see.
Read/listen:
CPI cools in February, unlikely to prompt rate cut
The week ahead: Sarb interest rate decision as geopolitical tensions bring out the hawks
Middle East war has ‘sapped’ confidence – SBG’s Goolam Ballim
Sasol has nearly doubled in 12 months, but is it still cheap?
The ‘petro-dollar’ and why Africa must boost its energy refining capacity
If this really continues and oil remains above $100/barrel for a prolonged period, I do not think we should put it past the Sarb to say, listen, we want to bring inflation under control.
Lesetja Kganyago has been very, very clear. Our mandate is to keep inflation under control.
SIMON BROWN: Yes. Absolutely, that has been his North Star. I suppose he is a central banker – that is what the sticker on his office door says.
We’ll leave it there. Lully Kruger, chief economist at PwC South Africa, appreciate the early morning.
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