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US decision to opt out of nuclear agreement will have a direct negative impact on South Africa’s growth outlook

17 May 2018Clive Eggers, GTC
Clive Eggers, Head: Investment Analytics at GTC.

Clive Eggers, Head: Investment Analytics at GTC.

President Trump’s recent announcement that the US will no longer honour the Iran nuclear deal has consequences far beyond the geographical borders of the obviously affected countries. South Africa, and its developing economy too will feel a significant negative impact due to the planned imposition of US sanctions.

The US president created upheaval in global politics last week when he announced – despite pleas from various countries – that he would indeed follow through on his electoral promise and withdraw from a landmark agreement that would see US-imposed sanctions lifted on Iran, in exchange for the latter’s limiting of its nuclear activities.

“Some mistakenly believe that this decision only impacts larger developed economies, when in fact the ripple effects will be keenly felt locally as well,” says Clive Eggers, Head: Investment Analytics at leading wealth and advisory firm GTC.

“The most direct and immediate impact of the US announcement is on the price of oil, which has already risen to approximately $80 (at the time of writing), which is a level last seen in 2014. If the US persists with its plans and imposes sanctions after six months, there will be definite upward pressure on the oil price,” he says.

In his announcement last week, President Trump threatened to impose the highest level of sanctions on Iran after a 180-day ‘winding down’ period.

Eggers believes that if the oil price continues to climb - which it will if the US actions remain in place -and inflationary pressure builds, the South African Reserve Bank may be forced to raise interest rates to stabilise the economy.

The other equally important effect of this announcement is that it creates immense uncertainty within the global economy. Eggers warns that this will affect South Africa as well: “As the country is only beginning to emerge from the economic stagnation of the past decade and is slowly starting to build momentum towards improved growth, international investors will be cautious of emerging markets such as South Africa, which are net importers of oil and whose economic growth will subsequently suffer under higher energy prices.”

South Africa imports its oil primarily from Saudi-Arabia, Nigeria and Angola. This currently shrinks the country’s GDP by 0.3%, which will come under pressure from higher oil price, which is highly likely to increase.

“Trump’s announcement has essentially put the entire Middle East into a state of flux and risked a potential destabilisation of the area. The other signatories to the agreement have – for now – agreed to maintain the status quo and continue with the deal, though American sanctions would make it very difficult for many global companies – including MTN, Airbus, Total and Peugeot – who resumed doing business in Iran after the original nuclear deal was announced, to continue dealing with Iran,” says Eggers.

South Africa has strong historical ties with Iran, as it first started importing Iranian oil after World War II and has constructed refineries to accommodate Iranian light crude oil.

“South Africa was the third biggest importer of Iranian oil until 2011, when sanctions were imposed.”

The Organisation for Petroleum Exporting Countries (OPEC) has given assurances that its members will be able to increase production to make up for any shortfall which Iran may leave. Iran produces approximately 3% of global oil demand. This may help to anchor the price somewhat, but Eggers warns that the energy spectrum is significantly different today as compared with s when sanctions were originally imposed upon Iran.

“Two major oil producers – Nigeria and Venezuela – have substantially reduced oil production due to separate challenges in each of these economies. At the same time, the International Oil Agency estimates that global oil consumption has increased to an estimated 99.3 million barrels per day in 2018, from 85.8 million barrels per day ten years ago,” he says.

“While there are an increasing number of plans afoot to switch to cleaner fuel sources, we are still a long way from achieving this goal. This is simply another indication that President Trump’s announcement is likely to have major ramifications around the globe due to the world’s continued dependency on oil as a significant energy source.”

Eggers foresees that, due to its potential global ramifications, the UK, France, Germany, China and Russia will work hard to convince President Trump to review his decision.

“In a best-case scenario, this incident is President Trump employing his ‘strong-arm’ tactics to encourage Iran to soften its position, before he counter-offers concessions to ‘seal the deal’. Unfortunately, South Africa has no influence in this situation, and is left to trust that the leader of the free world considers the global consequences of his decisions,” continues Eggers.

“Most importantly, I must emphasise that no matter what the economic circumstances may be, we do not recommend making significant or structural changes to investment portfolios based primarily on short-term market movements. Our team at GTC will continue to oversee our investment portfolios in a consistent manner, maintaining focus on the delivery of long term investment returns within a diversified risk-controlled structure,” Eggers concludes.

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