Even though South Africa recorded a trade surplus in the first two months of the year, that could reverse given higher oil prices.
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South Africa’s trade balance has strengthened sharply at the start of the year, but rising fuel costs linked to the Middle East conflict are beginning to cloud the outlook.
The country recorded a trade surplus of R45.4 billion in the first two months of the year, up from R3.3 billion in the same period last year, according to Investec chief economist Annabel Bishop. This is an increase of more than 1,200% year-on-year.
January alone swung from a R16.8 billion deficit last year to a R8.5 billion surplus this year, reversing the usual seasonal trend where exports typically weaken after the festive period, said Bishop.
“January typically runs a trade deficit, due to a drop in production in the festive season, and so sees lower exports in January, while imports tend to persist apace, influenced to a significant degree by international product prices,” added Bishop.
The trade balance forms part of South Africa’s broader balance of payments, which tracks money flowing into and out of the country. A surplus means export earnings exceed import payments.
However, the improvement comes as pressure builds on the import side of the equation.
Oil and petroleum products remain South Africa’s largest import category, accounting for more than half of the country’s top ten imports in the first two months of the year, Bishop said, highlighting the country’s exposure to global energy prices.
This means shifts in oil prices have a direct impact on South Africa’s import bill, trade balance and inflation outlook.
The pressure continues to feed through into fuel costs. A further increase of about R3 per litre for petrol and R9.05 per litre for diesel is building for May, following sharp hikes at the start of the month, Bishop has modelled.
Global oil prices have remained elevated at around $95 per barrel, as markets weigh ongoing tensions in the Middle East and disruptions to supply routes, particularly through the Strait of Hormuz, according to Trading Economics.
The website also noted that uncertainty around the conflict continues to keep energy markets volatile.
Bishop expects the lagged effects of higher fuel costs to push consumer inflation to around 4% this year, increasing the likelihood of a 25 basis point interest rate hike around mid-year.
The International Monetary Fund has also revised South Africa’s growth outlook lower to 1.0% for the year, down from 1.4%, although Investec expects a less severe slowdown.
Bishop said the conflict is currently expected to shave about 0.1 percentage points off economic growth but said that “a longer war would see a more substantial effect”.
Trading Economics noted that the rand is holding close to the highest since 10 March, mainly benefiting from a subdued dollar and elevated precious metals prices. “This reflected renewed optimism about a potential resolution of the Middle East conflict,” it noted.
Andre Cilliers, currency strategist at TreasuryONE, said the rand has been supported by optimism around a potential peace deal, with the US dollar weakening as investors move away from safe-haven assets.
However, he cautioned that risks remain, with energy prices and inflation still sensitive to developments in the Middle East.
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