The rand might weaken to as much as R17.63/$ this year if the raging conflict between the US, Israel and Iran continues for six months or more, according to a model by professional services firm EY-Parthenon.
The firm also expects South Africa’s economy might shed R40bn should the war go on for more than six months, with the agriculture sector poised for further strain as higher fertiliser and transport costs could cause food-price pressures.
The rand weakened to as much as R16.91/$ on Monday, the weakest since December, before staging a recovery.
The JSE took a breather from last week’s rout, which caused the all-share index — the broadest measure of the performance of South Africa’s market — to shed more than 12,000 points since the first bombs hit Iran just more than a week ago, wiping off more than R2-trillion in value.
The sell-off in the all-share index of 9.4% in one week is the worst since the outbreak of Covid-19 in South Africa in 2020.
Three scenarios
EY has modelled three scenarios on how the war is likely to affect markets: shallow global slowdown (if the war rages on for a month), deepening global drag (three month conflict) and protracted escalation, global contraction (more than six-month conflict).
Under the protracted escalation, EY said the oil price might reach as much as $120 per barrel through the second half of 2026, triggering widespread cost-base disruptions.
“The rand weakens further [under protracted escalation] as financial markets price in deeper global GDP losses and prolonged uncertainty. With multiple quarters of deteriorating global conditions, domestic activity and external demand weaken materially,” the EY report reads.
“These scenarios are tested using a structural macroeconometric model that captures movements in South African and global GDP, crude prices and our trade balance, as well as exchange, central bank policy and inflation rates domestically.”
Old Mutual Wealth and Investment strategist Izak Odendaal, in his weekly investment note, said the retreat of equities was expected, but the bond sell-off was surprising.
“While not dramatic, developed market bond yields still rose over the past week (bond prices and yields move in opposite directions). Historically, investors typically flee to the safety of the bond market. Not even a disappointing US employment report on Friday afternoon could support the bond market, as would normally have been the case,” he said.
Inflation concerns
“Rather, it appears that inflation concerns are in the driving seat for now. Apart from the direct impact of the oil price, wars tend to be inflationary in general. They repurpose manpower and material that could be used elsewhere in the economy and destroy productive capabilities, thereby putting upward pressure on prices. Again, however, it will all depend on the scale and duration of the conflict.”
Odendaal said that though South Africa is a safe distance from the conflict, it will not escape unharmed, as its oil-importer status and its financial markets make it sensitive to changes in global risk appetite.
“The rand’s fall last week, for instance, was very typical. Indeed, given the scale of the shock, an even bigger fall would not have come as a surprise. The softer rand in turn compounds the increase in the dollar price of oil.”
EY’s modelling also projects inflation to surge to 4.5% this year, opening the door to two rate increases of 50 basis points.
The yield on South African 10-year bonds rose almost 80 basis points to 8.7%, having declined to near-decade lows a week before the war.
“Taken together, these downside scenarios imply a R30–R40bn drag on realised GDP (about 0.4 percentage point reduction in growth) relative to our baseline, pointing to a weaker growth environment driven less by domestic fundamentals and more by external geopolitical shocks that are becoming more frequent and more easily transmitted into South Africa,” EY said.
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