South Africa’s economic recovery is facing renewed pressure from the conflict in the Middle East, which is driving up fuel costs, stoking inflation and forcing markets to rethink expectations for interest rates, the Institute of International Finance (IIF) said Tuesday.
The Washington-based global financial industry association cut its 2026 growth forecast for Africa’s most industrialised economy to 1.3 percent from an earlier projection of 1.7 percent.
The downgrade comes as rising oil prices and fears of supply disruptions add fresh strain to an economy already grappling with weak growth, high unemployment and persistent infrastructure challenges.
“The improving economic outlook has been clouded by the Middle East conflict,” the IIF said in a report, warning that higher energy prices were complicating the country’s inflation and monetary policy outlook.
South Africa imports most of its refined fuel products and has become increasingly reliant on supplies from Gulf Cooperation Council (GCC) countries following the decline of domestic refining capacity.
That dependence leaves the country exposed to disruptions through the Strait of Hormuz, a critical global shipping route through which a large share of the world’s oil exports passes.
The IIF said diesel prices were rising faster than petrol prices because of South Africa’s greater reliance on imported diesel and weaker price regulation mechanisms for the fuel.
The impact of higher fuel costs is now feeding into broader inflation expectations.
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The institute said inflation was expected to average four percent this year, up from around three percent projected before the conflict escalated.
The change in the inflation outlook has also altered expectations for monetary policy.
Markets had previously expected South Africa’s central bank to cut interest rates twice this year as inflation moderated and economic activity remained subdued.
However, investors are now pricing in two rate hikes instead, amid fears that sustained fuel price increases could push inflation above the central bank’s target range.
Higher borrowing costs would add pressure on households and businesses already struggling with weak demand and elevated debt burdens.
The IIF also warned that South Africa’s external position was likely to deteriorate as import costs increase.
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It forecast the current account deficit would widen to 1.1 percent of gross domestic product in 2026, from 0.5 percent previously.
A widening current account deficit can make emerging market economies more vulnerable to shifts in investor sentiment and currency volatility.
On the fiscal front, the institute estimated South Africa’s budget deficit reached 4.5 percent of GDP in the 2025/26 fiscal year, which ended in March.
The deficit is expected to narrow slightly to 4.1 percent in the current fiscal year as the government continues efforts to contain spending and stabilise public finances.
Government debt is projected to ease gradually over the medium term, declining to 77.1 percent of GDP from a peak of 78.9 percent recorded in the last fiscal year.
Despite the weaker outlook, the IIF pointed to several factors that could provide support for the economy.
It said reforms aimed at improving South Africa’s struggling ports and rail network could help the country benefit from the rerouting of global shipping traffic around the Cape of Good Hope.
Shipping firms have increasingly adjusted routes to avoid areas affected by instability and security risks linked to tensions in the Middle East.
The institute also said elevated global commodity prices could support investment in South Africa’s mining sector, a key source of export earnings and foreign exchange.
South Africa remains one of the world’s major producers of minerals including platinum, gold, coal and manganese.
Still, the IIF cautioned that geopolitical tensions and volatile energy markets posed significant risks to the country’s fragile recovery.
With growth expected to remain weak and inflationary pressures building again, policymakers face increasingly difficult trade-offs between supporting economic activity and maintaining price stability.
