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How Trump's nuclear move could hit SA economy and consumers

May 10 2018 16:18
Lameez Omarjee

President Donald Trump delivers a statement on the terrorist attack in Manchester during a meeting with Palestinian President Mahmoud Abbas, in the West Bank City of Bethlehem. (AP Photo/Evan Vucci)

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US President Donald Trump’s decision to exit the Iran nuclear deal might not have a bearing on local interest rates just yet, say economists.

Trump this week announced that the US would pull out of the Iran nuclear deal and reimpose sanctions on the oil-rich country.

The rand weakened slightly below R12.70 to the greenback to trade at R12.72/$ following the news, which  opened for debate chances that the local unit could trade at R13/$, said market analysts.

Dr Rashad Cassim, head of research at the Reserve Bank, who spoke to Fin24 about the possible risk of Trump’s move for the South African economy and the country's consumers, explained that if Trump’s decision could fuel already high oil prices - this would not be good news, considering that South Africa is a net importer of oil.

The country would be on the short end of negative terms of trade, having to pay more for oil. Secondly, oil prices are an important determinant of inflation in an economy and economic growth. South Africa could see a contraction in growth, said Cassim.  

On Thursday the rand received a welcome boost from a weaker dollar and lower-than-expected US consumer inflation data, trading1.63% firmer at R12.35 to the US dollar by 15:43. 

Bloomberg reports oil extended its three-year high as tensions in the Middle East flared following the US decision to renew sanctions on Iran, OPEC’s third-largest producer.

Crude’s recent rally has been propelled by Trump’s Iran move and simmering geopolitical tensions surrounding the Middle East. The sanctions could cut Iran’s oil exports by as much as 500 000 barrels a day in the next six months, Bloomberg quoted UBS Group.

On Thursday afternoon Brent crude was trading at $77.34 a barrel.

Cassim warned that there may also be a flow of capital funds away from emerging markets to the US if its Treasury yields increase. “There are some financial instability risks we must watch carefully,” he said.

“It’s really about what Trump means for the oil price and what the associated risks are of a higher oil price for South Africa. What happens in financial markets and whether it contributes to an increase in Treasury yields could put pressure on us.

"We are likely to see some capital going out of the country, and that will put pressure on the exchange rate,” he explained.

“It’s one thing to have the oil price go up because of more global demand in the economy. It is another thing to have the oil price go up because of geopolitics.

“I think that when the oil price goes up because the global economy is expanding, it is a much softer landing for a country like South Africa.”

Early days

However, Cassim said it is still early days to see how Trump’s decision will play out on the economy.

“It is premature to talk about whether this will fundamentally affect the MPC (monetary policy committee),” said Cassim.

Before making a decision on changing interest rates, the MPC would have to consider what the global risks are and if they have changed since the last meeting, and how that would impact both inflation and economic growth, he explained.

“We can’t get carried away by daily events,” he said. The MPC must consider how it can balance the risks.

Professor Jannie Rossouw, head of the Wits University School of Economic and Business Sciences, said uncertainty in financial markets is usually bad for emerging markets like South Africa in the short term. This is why there are movements in the exchange rate.

Rossouw agreed that there may be a flow of capital away from emerging markets to the US, where there is more certainty. 

“If the rand depreciates, it can mean inflation can increase or there will be higher interest rates.”

But Rossouw added it is too soon to tell how the MPC would react. If the Reserve Bank does respond to the global risk created by Trump’s decision, it would probably happen later and not at the next MPC meeting due in two weeks.

Higher oil price

Investec chief economist Annabel Bishop pointed out in a report on the oil price that Brent crude has reached R980 per barrel (bbl), compared to R664/bbl a year ago. It is also higher than the R799/bbl reported at the beginning of April.

“The rand has also depreciated on the month, leading to a current large petrol price increase of around 75 cents per litre building for June, after April’s increase of 72c/litre and May’s 49c/litre rise,” said Bishop.

“Furthermore, diesel is currently set to rise by around 85c/litre in June, and illuminating paraffin by similar.

“The (above) petrol price for June, should it occur, would bring the Gauteng pump price to over R15/litre (up) to R15.70/litre – an all-time high, adding to consumer woes at a time when a multitude of consumer taxes kicked in on April 1, including VAT,” she said.

The higher oil prices would see consumer price index inflation increase, possibly to 5% year-on-year (y/y) in June. This would pull inflation to 6% by November 2018 and bring CPI inflation to an average of 5% for 2018.

“2019 is likely to see CPI inflation average 5.5% y/y, close to the upper limit of the inflation target in the MPC’s forecast period. This should scupper any chance of an interest rate cut at the upcoming MPC meeting at the end of this month.”

Bishop explained that markets fear an escalation in geopolitical tensions in the Middle East, even possibly a US-led war with Iran. This could place upward pressure on oil prices.

She explained that if the oil price rise is sustained, it could feed into price increases in other consumer products as retailers consider the increases in transport prices.

“However, any fuel-led second round price hikes are only likely to materialise notably in the second half of 2018, and so the MPC is likely to not become materially concerned before then.

“Indeed, we expect interest rates to remain unchanged for the rest of the year. Should oil prices climb further towards the $100/bbl (R1 237.60/bbl) mark, the MPC will likely become more concerned,” said Bishop.

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sarb  |  donald trump  |  sa economy  |  oil  |  repo rate  |  interest rates  |  inflation
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