A prolonged Middle East war extending into the second half of the year is likely to put pressure on net oil importer South Africa’s current account, in addition to hindering its GDP growth prospects for 2026, according to Citi.
Consumer inflation could peak at 4.9% in the first quarter of 2027 if global oil prices remain elevated, and the South African Reserve Bank will probably raise interest rates twice this year to manage those risks, economists at the banking group said on Thursday.
“According to all of our modelling and looking over time, the current account will also take a hit in South Africa because we [South Africa] are a net importer of oil,” Citi South Africa economist Gina Schoeman said in a briefing on the likely effect of the Iran war on Sub-Saharan African countries.
“It [the current account deficit] should widen by about 0.25 percentage points for every 10% increase in [the] oil [price].”
Citi now expects the Reserve Bank to raise interest rates by 25 basis points each in May and July. At the start of the year, economists were pencilling in at least two reductions as inflation eased to reach the Bank’s 3% target. But those hopes were dashed when the US and Israel attacked Iran in late February, sending global oil markets into turmoil.
The saving grace for South Africa has been increased fiscal discipline by the Treasury, which has strived to stabilise debt and reduce debt servicing costs while also running a primary budget surplus.
“We’ve now got a national treasury that has become far more credible. Together, working with the Bank, they have been able to drop debt servicing costs because of what’s happened with our bond yields,” Schoeman said.
“If you have a look at [the] rand/dollar [exchange rate] where it is right now, arguably under the same conditions that we’re dealing with globally, five to 10 years ago the rand would have been much weaker than where it is right now,” she added.
“That gives you a good indication … of how much that risk premium in South Africa has come down because investors know that the Bank will not take inflation lightly.”
Worst-case scenario
The worst-case scenario for the country is that the Middle East conflict extends into the third quarter of the year, further exposing the vulnerability stemming from South Africa’s low oil reserves, Schoeman told Business Day on the sidelines of the briefing.
“If things are so dire that the oil price is reaching $150 per barrel, if not higher … then your currency in South Africa is a lot weaker … something above R17/dollar easily,” she said. “This is where the Bank comes in, and you will have rate hikes to nip inflation in the bud.”
“So the biggest lesson South Africa can learn from this crisis is that we need to lift our reserves of oil and refined fuel in line with the global average because you need them in times of crisis. If other countries have them and you don’t, you’re going to look very vulnerable,” Schoeman added.
Citi’s Africa economist David Cowan said Sub-Saharan African countries have implemented what they hope will be short-term measures to subsidise the price of fuel in their economies and try to contain inflation pressures.
“African governments are making a gamble and saying ‘we don’t think this conflict is going to last forever. We’ll subsidise the price for a while, and then we’ll see how it plays out’,” he said.
The Middle East conflict highlights the importance of reinforcing the African Continental Free Trade Area and expanding oil trade, Cowan argued.
“Historically, Nigeria’s oil exports went into the United States East Coast refining system. As the US has become more self-sufficient in oil, Nigerian oil exports were diverted to India and other places,” he said.
“But are you encouraging this shift and saying ‘we’re going to go to other African countries’? Whether what’s playing out now accelerates the African free trade agreement will be something that’s definitely worth watching.”
Glimmer of hope
A potential fix to the fuel problem for African countries could be Nigerian billionaire Aliko Dangote’s new refinery in Lagos, which started producing diesel, aviation fuel and petrol in 2024–25. Africa’s largest refinery aims to eliminate Nigeria’s reliance on imported fuel, bolster local energy security and export to other African nations.
“Essentially, Nigeria now has — in a world crying out for crude products — around 250,000 barrels a day to export,” Cowan said.
“What we saw, which I think is important for Africa’s development, is that Dangote has started to sell some of those cargoes to other African countries,” said.
“He sold some to Ghana, to Togo, and then he took some around to Ethiopia and Tanzania. And we do know that the South African government is also in negotiations with Dangote.”
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