South Africa experienced its largest single fuel price hike following the Department of Energy’s announcement on Monday that a litre of 93 unleaded (ULP) and lead-replacement petrol (LRP) will rise by 99 cents while the 95 variants will increase by R1. Illuminating paraffin hasn’t been spared and goes up R1.04 cents a litre in the second revision in just two months. The latest hike will have far-reaching consequences.
South Africa is already struggling with negative per-capita growth, a poverty rate at around 40%, and unemployment nearing 27% (almost twice that for the youth). The latest move – described by the Automobile Association as a siphon costing the economy R2.5 billion a month in transport costs – is set to put pressure on the consumer price index (CPI) by dampening disposable income figures.
Source: Department of Energy, Stats SA
Fiscal consolidation?
South Africa’s fiscal objectives include reducing the budget deficit and stabilising debt as a share of gross domestic product (GDP) over the medium term. The fiscal consolidation aims to reduce the primary deficit to near zero by 2021, with the consolidated budget deficit declining from 4.3% in 2018 to 3.5% in 2021.
Mike van der Westhuizen, portfolio manager at Citadel, says: “Although changes in fuel prices are short-term in nature – month to month – a prolonged trend of rising fuel prices like we’ve seen can actually have a negative effect on fiscal consolidation.”
While government has implemented several revenue measures for 2018/19 – including increasing the Vat rate, fuel levy and excise duties, and limiting personal income tax-bracket adjustments for inflation, which, on paper, should translate to 26.6% of GDP and rein in the spiralling debt – its hands are tied in certain respects.
The latest fuel revision was triggered by external headwinds, not fiscal reform.
As van der Westhuizen explains, the basic fuel price is adjusted for the cost of what a South African importer would pay to buy petrol from a refinery and land the product on our shores, so it is a function of the rand and US dollar oil price, and not government control.
Miyelani Maluleke, an economist at Absa Corporate and Investment Banking, agrees, saying the increase in October was primarily because of higher international oil prices and a weaker exchange rate, not because of a higher government fuel levy. “So there’s nothing in this latest increase in fuel prices that will accrue to the fiscus – it is purely just to cover the higher cost of importing Brent crude oil.”
Micro-level effects
From a household point of view, the hike in the fuel price lessens disposable incomes as petroleum products constitute a substantial proportion of the urban household CPI basket.
Gwarega Mangozhe, CEO of the Consumer Goods Council of South Africa, says: “The latest fuel price increase, the highest on record so far, will seriously affect already stretched household finances. Although our members in the retail and consumer goods sector have and continue to absorb input costs, it is becoming increasingly difficult to sustain these increases.”
Maluleke concurs. “We estimate that South African households will spend about R14 billion more on fuel this year compared to 2017.”
While higher fuel prices make production more expensive for businesses, just as they make it more expensive for households to do the things they normally do, smaller retailers are bound to be the most affected.
“Times are tough and consumer spending remains under pressure – and this has been exacerbated by elevated household debt and the rising cost of living,” says Mangozhe. “We have noticed that shopping baskets have become smaller and many consumers have become bargain hunters as they opt for basics rather than luxury purchases.”
Spending power impairment remains a down risk for the economy.
As van der Westhuizen says: “Stats SA showed that in 2017, spend on petroleum products accounted for around 3.5% of total household consumption. Transport spend forms a larger part of the basket of lower-income households, which form a smaller part of overall consumption – but still, the effect nationally is said to reduce spending power by about 0.3% of GDP.”
Food prices also experience price movements. “Food price inflation has been fairly contained in recent months,” says Maluleke. “But there’s certainly risk that the higher fuel prices begin to have second-round effects on domestic food price inflation going forward because fuel is a big part of the distribution costs of food.”
However, projecting food price movements is complex. “Food makes up around 17% of the CPI basket,” says Van der Westhuizen. “We’ve experienced some relief from food price disinflation over the past 18 months. Naturally, this trend can’t persist and the threat of El Niño has become more apparent going into 2019. This is likely to exert some upward pressure on food price inflation, although the magnitude is uncertain.”
Rocket-feather effect
For many developing and emerging markets, oil prices rise and retailers pass on the full increase in their costs to consumers, causing the price of a litre of diesel or petrol to go up like a rocket. However, during times when the price of oil falls, pump prices only drift down like a feather, while retailers pocket the difference – as was the case in South Africa in 2015.
Source: InvestSA
Inflationary pressure
The Stats SA CPI for annual fuel inflation, which incorporates prices for all forms of fuel, registered at 2.6% in August 2018, with the headline CPI (for all urban areas) annual inflation rate at 4.9%.
The South African economy is bound to feel the inflationary pressure attested to by the 23.6% year-on-year change in fuel inflation. Essentially, South Africans paid 23.6% more for fuel in August 2018 than they did a year ago – and that was before the latest fuel hike.
“We expect headline CPI inflation to rise further over the coming months because of these effects,” says Maluleke.
- Moneyweb
