It’s an ill wind that blows nobody any good, they say, because, usually, someone will benefit from a crisis, no matter how bad.
In the case of Ukraine, SA has benefited as the prices of its key commodity exports have soared, helping to offset some of the negative impact on the domestic economy.
This is not to say that the country will achieve a net gain, especially if the war is protracted. Spiking oil and gas prices could cause a recession in Europe, snarl global supply chains, and further fuel inflation.
But it does mean that the domestic impact may be less severe than it could otherwise have been.
Take, for instance, the initial reaction of the rand and SA bond market. The Bureau for Economic Research (BER) notes that the rand has so far been "fairly well behaved", losing only 0.5% against the dollar last week as investors dumped risky assets in a global flight to safety.
This is because the rand has been supported by rising prices of gold, coal and platinum group metals (PGMs) — gold for its safe-haven status, and the other commodities due to fears that the war could cause shortages. (Russia is a major exporter of oil and gas, coal and aluminium.)
Rand Merchant Bank head of research John Cairns concedes that while global risk aversion tends to dominate rand movements, SA’s rand fundamentals, as explained by commodity prices, are looking "extremely strong" and "arguably have actually improved from the Russian invasion of Ukraine".
Similarly, while SA bonds sold off as Russian troops rolled in, the jump in yields was "mild" compared with other episodes of global risk aversion and emerging-market panics, says Old Mutual Wealth’s Izak Odendaal.
This, he says, reflects SA’s better fiscal outlook, as well as expectations that inflation will remain under control, even with higher fuel and food prices.
Russia and Ukraine account for a quarter of global wheat exports and 15% of global maize exports. In the run-up to the conflict, international prices spiked 21% year on year for maize, 35% for wheat, 20% for soybeans and 11% for sunflower oil. Prices were already elevated due to Covid and adverse global weather patterns.
[Putin’s actions] could reshape the global economic and geopolitical order in profound but unpredictable ways
— Izak Odendaal
While this is good news for some SA farmers, helping to offset the spike in imported fertiliser prices (Russia is a key producer), it is sparking concern among SA citrus, apple and pear farmers who export increasing quantities of the fruit to Russia. It is also bad news for consumers, who have already experienced significant price hikes over the past two years.
Local economists are grappling with two main questions: how likely is the conflict to spoil the global recovery from the pandemic? And what is the net effect likely to be on SA?
BER chief economist Hugo Pienaar notes that US fiscal tightening, rising developed-country policy rates, and problems in the Chinese property market were already set to slow the global recovery this year.
"Depending on the length of the conflict and, crucially, whether gas supplies to Europe are interrupted, the associated uncertainty and higher energy prices will subtract further from near-term global growth," he warns.
Though the West has imposed severe sanctions on Russia, the energy sector has been shielded, as Europe depends on Russia for 40% of its gas needs and Russia is responsible for 12% of global oil output.
But even if Russia doesn’t retaliate by curbing gas and oil supplies, the surge in energy prices, potential rationing of gas, elevated uncertainty and falling confidence will weigh on Europe’s recovery.
Barclays’ economists fear the war could trigger a recession in the eurozone. If so, SA will be hit because the eurozone remains its largest export market.
However, whereas Russia and Ukraine will suffer sharp economic contractions, the current consensus is that the overall global economic recovery will continue.
Certainly, says Odendaal, the world is "not at the point where higher commodity prices and rising interest rates [will] trigger a global recession, yet".
But he does worry that President Vladimir Putin’s actions "could reshape the global economic and geopolitical order in profound but unpredictable ways".
The economic impact depends on the magnitude of the conflict, how commodity and financial markets respond, and how calmly global central banks react
— What it means:
Cairns remains sanguine. "The war in Ukraine is not going to spill over into other countries, Nato is not going to get involved and, importantly, Western countries are not going to put sanctions on Russian oil and gas," he says.
He also believes — as does Barclays — that because the conflict will be negative for developed-world growth, central banks will turn less hawkish.
"So, yes, the Fed will still hike but perhaps less than they would have," says Cairns, even if US inflation goes as high as 8% or 9%. He also expects the European Central Bank to become more dovish, even if inflation goes another leg higher.
The immediate impact of the war on SA has been to stoke inflation, with the rand weakening and oil spiking to more than $100/bbl. (This month the price of petrol will rise above R21/l for the first time, due to factors that occurred before the invasion.)
Pienaar fears the Reserve Bank might, in an environment of persistent energy price shocks and rising general inflation, hike rates by more than expected — something SA markets have already started to price in.
The higher oil price will also lift SA’s import bill. Though Pienaar concedes that the hit to the trade balance should be partly countered by sustained higher prices for export commodities such as gold and PGMs, he still expects the overall net impact on the local economy to be negative.
This will be compounded if growth in the eurozone is hit materially by the fallout from the war.
Ultimately, the net effect on the SA and global economies will depend on the magnitude and length of the conflict, how international commodity and financial markets respond and how calmly global central banks react.
Cool heads must prevail.
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