The Institute of International Finance (IIF) said on Tuesday that South Africa's improving economic outlook has been overshadowed by the Middle East conflict, which is pushing up energy costs and complicating monetary policy.
In a fresh set of projections, the IIF reduced its forecast for South Africa's 2026 economic growth to 1.3%, down from a prior estimate of 1.7%. At the same time, expected inflation for the year was raised to an average of 4%, up from around 3% that had been anticipated before the conflict.
The IIF highlighted South Africa's growing reliance on the Gulf Cooperation Council (GCC) for refined petroleum products, saying this dependence increases vulnerability to supply disruptions originating in the Strait of Hormuz. The institution also pointed to a faster rise in diesel prices relative to petrol, attributing the divergence to a heavier reliance on imports for diesel and to weaker price regulation in that market.
Market pricing has adjusted sharply in response to these developments, the IIF noted, moving away from a previous expectation of two interest-rate cuts this year to pricing in two hikes instead.
On external balances, the IIF now sees the current account deficit widening to 1.1% of GDP in 2026, compared with 0.5% previously. Fiscal projections show a deficit estimated at 4.5% of GDP for the fiscal year 2025/26, which ended in March, with the IIF forecasting a narrowing to 4.1% of GDP in the current fiscal year.
Public debt is expected to fall gradually in the medium term, the IIF said, easing to 77.1% of GDP from a peak of 78.9% of GDP in the fiscal year 2025/26.
Not all developments are negative, the IIF added. Reforms in ports and rail could see benefits if cargo is rerouted around the Cape of Good Hope, and elevated commodity prices are supporting mining investment.
Implications for sectors
- Energy - higher fuel costs and greater import dependence may pressure transport and logistics margins.
- Transport & Infrastructure - port and rail operators could gain from cargo rerouting around the Cape of Good Hope.
- Mining - sustained commodity prices are supportive of investment in the sector.
The IIF's updated outlook reflects a mix of near-term headwinds from geopolitical developments and selective upside from infrastructure reforms and commodity market strength.