The Effects Of The War On South Africa And Global Economies

When Finance Minister Enoch Godongwana delivered his maiden budget speech in February 2022, little did he know that Russia would invade Ukraine the very next day, immediately changing both the world and South Africa’s economic outlook for 2022 and beyond.

The impact of the Russian-Ukraine war on South Africa and the Rand  

Despite the rebound in economic growth since the COVID-19 recession, more time and growth are needed to get the economy back to pre-COVID levels and, while the economy is stagnating, population growth is not – thus the challenges of record unemployment. The invasion of Ukraine created new economic challenges for South Africans, such as rising prices in essential commodities like fuel, fertilizer and a combination of agricultural products which will further hurt consumer pockets. Given these challenges, economic growth is expected to remain around only 2% over the next few years.

Says Ackerman, “Last year the economy experienced several tailwinds. Mining had an exceptional year and was up almost 12%, while agriculture was up by around 8% – both of which helped to underpin economic growth and better-than-expected tax collection that supported a reduction in the budget deficit. Now, with higher oil, gas and fertiliser costs, the agricultural sector must prepare for a tougher time through to 2023. Export growth is also going to be impacted as the global economy wanes on the back of war, high inflation, and monetary tightening.”

The rand should remain under pressure as the tailwinds from last year’s positive trade balance start to fade. Another headwind for the trade balance is the price of oil, our biggest import item, which has jumped on average from $50 per barrel last year to over $110 per barrel this year. It is expected that the trade surplus should turn back to a deficit in the next year which is bad news for the local currency.

Despite these trends, South Africa can benefit from exporting some of the sanctioned commodities that Russia used to export. The true benefit unfortunately depends on the efficiency (or lack thereof) of the local logistical infrastructure.

Ackerman says local infrastructure is taking strain with the increased export load and that, to meet global demand for our commodities, we need functioning railroads and harbours, and we recently took a devastating knock by the flooding in KwaZulu-Natal which boasts one of our biggest harbours. “Our lacking infrastructure maintenance and building is reflected in the ailing construction sector which saw a further 2% decline last year,” he says.

South Africa is unlikely to see the growth it needs in the next two to three years. Inflation is on the high-end of the South African Reserve Bank’s (SARB’s) target. Local inflation could exceed the 6% SARB target if we experience a supply shock through higher food and oil prices. The SARB, however, cannot hike rates purely to combat sticky inflation as the country does not have a lot of demand-driven inflation so excessive rate hikes would hurt the consumer and ultimately the economy.

Global economic headwinds and a possible recession ahead 

“The start of the year saw the global economy rebounding to new highs, with equity markets soaring, consumer spending recovering, and higher inflation considered a short-term hiccup – but the outlook for the global economy took a drastic turn from March 2022. Soaring commodity prices which dramatically weakened the global inflation outlook and impacted consumer confidence negatively, has made the markets more volatile. The risk of a recession has almost doubled since the start of the year, should the war not end soon,” says Ackerman.

The Citadel Recession Scorecard, which examines 10 economic fundamentals, in January 2022 placed the likelihood of a recession at around 25%. Now, following the geopolitical developments, it has jumped to over 40%.

With the implementation of sanctions, global food and commodity shortages will have a major impact on prices and result in higher and more sticky inflation. In addition, China’s zero-COVID policy and widespread lockdowns are also causing pressure on global supply, while Europe’s supply chain issues are reflected in Germany’s Producer Price Index (PPI) which is at its highest level in 73 years.

The European Central Bank believes Europe’s challenge is supply inflation and is taking a cautious approach, indicating that an imminent rate hike is unlikely. In the US, the Federal Reserve is taking a more hawkish view on inflation, hiking interest rates and looking to significantly tighten monetary policy in an attempt to curb record-high inflation. Fortunately, US interest rates are coming off a very low base, so it will be some time before rates reach 2% to 3% levels, which hurts consumers and companies. We are fortunate to still have healthy gross domestic product (GDP) growth margins in developed economies for now.

How to navigate this investment climate

“We need to ask ourselves, what is the likelihood of another global recession in the next 12 months? Fortunately, we believe the global economy is not there yet and that global growth is sufficiently high to ensure that companies should remain quite profitable. Our view is that a recession is unlikely this year, but risks are mounting and as the storm clouds keep building, we will continue to de-risk and protect our portfolios,” says Ackerman.

Ackerman contends that the best way to navigate any investment climate is to take a long-term view, stick to the insight that the future is always uncertain, continue with scenario planning and portfolio diversification in response. “We always caution against buying expensive assets, no matter how attractive they may look, and we firmly believe in the value of determining the right asset allocations for each client to meet their short-, medium- and long-term needs and preserve their wealth through various cycles, especially during volatile times,” says Ackerman.