SA Consumers Still Better Off Than Last Year, Despite Fuel Hikes

BY GWEN BOSMAN - APRIL 7, 2015

The petrol price increase of over R1.60 per litre on 1 April has left many consumers concerned about increasing pressure on their pockets. However, the hike is not necessarily the harbinger of doom for South African interest rates, or the 2015 economy as a whole, with the current petrol price still R1.50/litre lower than the peak of last year.

This is according to Johann Els, Senior Economist at Old Mutual Investment Group, who says that this relatively lower fuel price combined with recent tax benefits still means a R20-billion relief for consumers in 2015.

Els points out that while the hefty fuel price rise will understandably have an impact on the finances of all South Africans in the short term, it’s important to consider the bigger economic picture.

“April’s price increase was primarily the result of a combination of fuel tax increases announced in the last budget and a still very strong US dollar,” Els explains. “It had little to do with any sustained upward trend in the price of oil.”

However, he says that further declines in the petrol price are not impossible, given his assumptions for oil and the Rand and on average, and the petrol price could be up to R2/litre lower this year than in 2014.

This is a significant consideration when assessing the economic future of South Africa for the remainder of 2015, he says. In fact, he predicts that the likelihood of continued low oil prices, combined with a more stable local currency, means that the country’s economy may well be in for a better year than was the case in 2014. 

“The recent oil price move from the low of around $47/bbl to about $60/bbl was the result of stock building around the world,” Els explains, “but this increase in strategic reserves against a backdrop of continued strong production from most of the producing nations has meant that storage facilities are now largely running out of capacity. This should keep prices at around $50/bbl for the next two years.”

Els believes that this lower-for-longer oil price scenario should deliver a variety of benefits to the SA economy in the medium- to long-term, the most significant of which is sustained low inflation levels.

He acknowledges that the effects of a weak rand and strong dollar have the potential to negate some of these potential inflationary benefits. However, he argues that a sustained lower oil price should still mean lower average inflation in 2015 compared to 2014, especially if the rand stabilises further in the coming months.

And Els emphasises that the benefit of lower oil prices would extend beyond mere consumer comfort.

“Should oil prices ease further and the rand stabilise, even if only for a short while, there is a distinct possibility that we will see better trade and current account data for SA,” he explains. “This is primarily as a result of the effect this will have on lowering the country’s currently high oil import bill.”

Els also points out that, while the South African Reserve Bank has been understandably hawkish in its comments of late, the long-term inflation-limiting effect of a lower oil price should mean the bank takes a less aggressive stance on interest rate increases.

“While South Africa has not followed many developed countries, and some emerging ones, along the path of interest rate cuts, the predictions of rate hikes in SA in 2015 are likely to be unfounded,” he suggests. “And even if we do see a small rate hike later in the year, the lower real inflation scenario will still leave most South African consumers in a better financial position than they were last year.”

He does, however, point to one factor as having the potential to derail what could otherwise be a stronger showing for SA’s economy in 2015.

“Unreliable electricity supply, and any significant energy cost increases as a result, have the ability to undo the benefits of a low international oil price,” he warns, “and have a lasting negative impact on SA’s economic growth.

Els points out that the result of such a scenario would likely be rating agency downgrades for SA to sub-investment grade, which could put massive pressure on our currency and could completely negate the inflation-reducing benefits of the low global oil price. He emphasises, however, that this is a worst case scenario.

“Given the current low oil price, the lower inflation trajectory, the likelihood of an improved current account and a more stable currency, it will be difficult for the Reserve Bank to justify aggressive interest rate increase.”