The Iran War started on 28 February 2026 and has continued longer than what most political analysts expected. Hence it is worthwhile reflecting (briefly) on any change in South Africa’s economic fundamentals during the past month, especially since there was clear evidence of the South African economy starting to gain some traction during the preceding eight months, helped by 6 key economic fundamentals.
Six key positive developments in SA include:
- Inflation had consistently surprised to the downside, with both headline and core inflation reaching the 3% target in February 2026. This had strengthened the market’s expectation of further interest rate cuts. In fact, towards the end of February 2026 the market was pricing-in a further 100bps of rate cuts over the following 18 months.
- The February 2026 National Budget was well received, reflecting a clear commitment to fiscal consolidation as evidence by a further increase in the primary budget surplus. There was also a growing expectation that South Africa could see a further credit rating upgrade before year-end.
- Progress on public-private partnership (PPP) initiatives was gaining momentum. This included advancements in renewable energy projects, alongside the prospect of a significant private sector investment in electricity transmission infrastructure. In addition, there were encouraging developments in logistics sector, such as private sector participation in both rail freight and the management of Pier 2 harbour. Several private sector water sector initiatives had also been formulated, with increasing engagement between government and the private sector aimed at improving municipal service delivery, particularly across key metropolitan areas.
- The rand had been benefiting from improving economic fundamentals, as well as meaningful foreign investment inflows into the domestic bond market.
- South Africa’s terms of trade remained favourable for an extended period, supporting stronger tax revenue and contributing to an improved growth outlook.
- There were early signs of a shift in banking sector behaviour, with institutions becoming more willing to extend credit. Notably, private sector credit grew by 10.5%y/y in February 2026, its fastest annual rate of increase in 17 years.
The combination of these six factors pointed to the South African economy being in incrementally better shape. Unsurprisingly, domestic financial assets, including bonds, equities, and the currency all benefited from this more constructive narrative.
We now find ourselves one month into the Iran war - longer than initially anticipated -which has resulted in a sharp increase in domestic fuel prices and a sustained period of global risk-off sentiment. However, for now, the vast majority of South Africa’s underlying positive fundamentals have, at this stage, held steady despite the more challenging external environment. Economic growth forecasts have not been revised lower and structural economic reforms remain in focus.
But what has changed, and how material is that change?
The key impact of the Iran war is on the outlook for inflation, which has deteriorated meaningfully in just one month and risks deteriorating further. While the expected increase in SA’s headline rate of inflation to over 4.5% is not yet a crisis (as recently as 2022 SA’s inflation rate rose to well over 7% for seven consecutive months), it is meaningful enough to delay the achievement of the 3% inflation target for at least a year and possible for at least 18 months and it also delays the expected reduction in SA interest rates by approximately 9 to 12 months.
The second key impact is that the global risk-off environment has weighed on SA’s financial markets, including bonds, equities and the exchange rate. For example, the rand has moved from what appeared to be a position of overvaluation to one that now screens as undervalued.
Unfortunately, SA’s financial assets remain vulnerable to large global shocks.
However, should the United States and Israel start to de-escalate the conflict within the next few weeks (which is the base case), and there is a meaningful reduction in the international oil price by the end of April, the lasting impact of the Iran war on South Africa’s improving economic fundamentals is likely to be modest.
Most of the previously identified positives should reassert themselves. There would still be a credible prospect of a credit rating upgrade, and South Africa’s financial assets would start to recover lost ground. In this context, the rand could reasonably be expected to strengthen toward levels seen at the beginning of the year, potentially returning to around R16.20/USD.
The key risk is that instead of the conflict starting to be de-escalated, the US and Israel intensify their efforts through a ground invasion aimed at achieving specific military objectives. Such a development would likely extend the duration of the war by several months, at a minimum. In that scenario, the negative effects would become more entrenched. A prolonged period of elevated oil prices and global risk aversion would begin to erode a broader set of South Africa’s economic fundamentals. Growth dynamics would weaken, confidence would decline, and trade flows could become increasingly disrupted. This environment could begin to erode the progress made on fiscal consolidation, especially if higher inflation and weaker growth start to impact revenue and expenditure dynamics.
The consequence would be a more meaningful delay to South Africa’s hopeful economic recovery trajectory over the next two to three years, undermining the progress that had been establish prior to the conflict.
Lastly, but worryingly, other geopolitical risks may re-emerge later in 2026 and during 2027 that are as a direct consequence of the Middle East conflict. These include the possibility of increased retaliatory activity by Iranian proxies and a rise in isolated terrorist incidents in developed markets. Such developments could contribute to a more fragile global backdrop, potentially fuelling anti-US sentiment and creating broader unease in the global economy. However, South Africa may prove relatively insulated in this phase, as the domestic focus remains firmly on internal economic improvements. While not immune, it is likely to be less directly exposed to these risks than some other regions, and the rand could remain relatively resilient when compared its emerging market currency peers.
Advantage FX Solutions’ currency research is available on our FX Link platform. Articles are updated to reflect ongoing news. FX Partner login can be accessed from our website https://advantageteam.co.za/fx-solutions/.
Source: Advantage FX Solutions fx@advantageteam.co.za