SA faces growing inflation and food price spikes in wake of Russia-Ukraine war - two top economists

We are three weeks into the Russia-Ukraine conflict and already its impact is being felt in South Africa. In the past week, South Africa has experienced the first major load shedding for 2022, with Eskom stating its emergency diesel supply, needed to keep turbines running, will soon be unaffordable. 

The average Brent Crude oil price has also increased during this period. Rising oil prices have increased local fuel prices significantly. Petrol prices have risen to R21.60 a litre and could rise further, by more than R2, in April 2022. Rising fuel costs pose a threat to the containment in terms of food prices and cost of living, which were already on the rise prior to the Russia-Ukraine conflict.

Daily Maverick has interviewed chief economist at the Agricultural Business Chamber of South Africa (Agbiz), Wandile Sihlobo, and Efficient Group chief economist Dawie Roodt on the consumer impact of the Russia-Ukraine conflict, specifically on food supply and prices and the cost of living in general in  South Africa.

Michelle Banda: Will the Russia-Ukraine war impact on South African food prices? Which products could see price rises and supply issues?

Wandile Sihlobo: The Russia-Ukraine war has raised concerns about potential escalating global food insecurity as these countries are major exporters of grains, oilseeds, fertilisers and crude oil. Since the war started, the prices of these commodities have risen significantly, and South Africa, interlinked in the global commodities market, is exposed to these price increases. Given these realities, we must understand South Africa’s linkages to Russia and Ukraine’s agricultural trade, and how the unfolding war could potentially impact domestic food supplies.

Michelle Banda: What does the Russia-Ukraine crisis mean for the importation of wheat and sunflower oil to South Africa?

Wandile Sihlobo: South Africa has relatively weak agricultural import ties with both Russia and Ukraine. The major products both countries export to South Africa are wheat and sunflower oil. Over the past five years (2016-2020), South Africa imported an average of 1.8 million tonnes of wheat per calendar year, roughly half the annual wheat consumption needs. Moreover, South Africa imported an average of 174,138 tonnes of sunflower oil per year from the world market between 2016 and 2020. The significance of the Russia-Ukraine conflict has the potential to disrupt South Africa’s wheat and sunflower oil imports in the near term. 

Michelle Banda: Why is the Russia-Ukraine crisis bad news for food in South Africa?

Wandile Sihlobo: Although South Africa has relatively weak agricultural import ties with both Russia and Ukraine that does not minimise the importance of these countries for South Africa’s food basket. Russia and Ukraine may not be major suppliers of agricultural products to South Africa, but they have strong ties with the global grains and oilseeds market given their large export share contribution and this has an important bearing on commodity prices. This means the impact of the disruption in trade will, in the near term, be felt through prices rather than through a shortage of products. The Food and Agriculture Organization (FAO) global food price index, which was already at an all-time high in February, could register a new high when March 2022 results are released on 7 April 2022, and remain elevated for months thereafter, depending on the length of the conflict and market uncertainty.

Michelle Banda: The cost of living in South Africa was increasing long before the Russia-Ukraine conflict. What is the additional impact of the invasion?  

Dawie Roodt: The economies were just opening after Covid, large fiscal stimulation and accommodating low interest rates. All this has resulted in a surge in demand and supply disruptions and rising inflation. Now with the war, much of this is exacerbated first through the price effect (rising prices and reaction on the financial markets) and gradually also through the real economic effect — where actual economic activities are affected. The impact on South Africa is mostly through the price effect — good and bad, but on a net effect. Commodities prices are elevated resulting in a surplus on the current account and a surprisingly strong rand which also keeps a lid on inflation.

Michelle Banda: The impact of the Russia-Ukraine conflict is already being felt worldwide. What is happening in South Africa as far as the inflation rate is concerned? Has inflation increased, decreased or remained the same?

Dawie Roodt: Inflation was rising anyway before the war although recently it came down a bit mostly because of technical factors. Chances are that inflation will remain elevated, but a relatively strong rand will prevent it from going much above 6%, if at all. However, I think the commodity cycle will gradually weaken as alternative sources of oil, for example, come on stream. Then the rand may weaken much more and inflation will become a bigger issue. But that is still some time off.

Michelle Banda: What does that mean for people’s pockets in terms of the lending rate at banks for home loans and other loans?

Dawie Roodt: Sarb (South African Reserve Bank) was going to raise rates anyway and may now be forced to do a bit more. I expect between 1% and 1.5% or even more increase this year and the next. That means other rates will also go up and, given our weak GDP growth, wages will rise slower leading to higher unemployment and higher poverty.

Michelle Banda: As a financial expert, what would you advise South African consumers to do to reduce the impact on the possible rise in inflation?

Dawie Roodt: Do the basics; have a budget and plan as much as is possible and cut off unnecessary spending where possible, and keep your job! DM