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of disruptions in this artery are felt keenly across various industries. Within South Africa’s
network of trading partners, India occupies a significant position as the second-largest
source of imports by value. Notably, a considerable portion of South Africa’s diesel imports,

amounting to 24% or 2.9 billion litres in 2022, originate from India. The Global Trade Research
Initiative underscores that approximately 65% of India’s crude oil imports in the fiscal year
2023 likely traversed the Suez Canal, implying that interruptions at this crucial maritime
chokepoint can exert substantial impacts on both availability and prices of commodities.
South Africa’s heavy reliance on a critical maritime route introduces potential vulnerabilities,
especially concerning the risk of import-driven inflation, given its significant dependence on
India for diesel imports.

The disruptions in the Red Sea have triggered a surge in shipping rates, compelling companies
like Maersk and MSC to reroute vessels around the Cape of Good Hope, thereby prolonging
the journey by seven to ten days. This alteration in shipping routes directly impacts transport
costs, delivery timelines, and energy prices, potentially exacerbating consumer prices.

Adding to the mounting concerns about inflation is the drought affecting the Panama Canal,
a critical trade route utilised by 40% of all United States container traffic. UNCTAD reports a
significant 36% drop in total transits through the Panama Canal in December 2023 compared
to the previous year. With the typical dry season in Panama commencing in December
and extending until April or May, the bottleneck is anticipated to exacerbate in the coming
months, further intensifying the challenges faced in global trade and potentially contributing
to inflationary pressures.

Interest Rates

Last month, the South African Reserve Bank’s Monetary Policy Committee opted to keep the
repo rate steady at 8.25%, marking a ten-year high. Despite this relatively high rate, inflation
has decreased to 5.1% year-on-year in December. Projections suggest that the repo rate will
remain unchanged until the second quarter of the year, with an anticipated 25-basis point
reduction thereafter. However, the descent from this peak is expected to be gradual rather
than swift. Despite initial achievements in curbing inflation, the external challenges outlined

above present a significant threat to sustained progress.

Although the South African Reserve Bank’s restrictive monetary policy has played a role
in managing inflation, external challenges persist. The policy choices made by the South
African government are pivotal in addressing these challenges. Without essential reforms,

the effectiveness of the Reserve Bank’s monetary policy remains constrained. Adequate
government policies and prudent spending decisions have the potential to enhance price
stability. However, in their absence, the process of reducing high interest rates and mitigating
price increases becomes prolonged and more precarious than it needs to be.

Mlondi Mdluli is a Senior Economic Researcher at the Centre For Risk Analysis. He is also a PhD candidate
in Economics at the University of Reading, in the United Kingdom.

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SA CHAMBER UK NEWSLETTER FEBRUARY 2024