The government has decided to extend the fuel tax relief for two months. This meant that a planned rise of R4 per liter had not materialised. But the measure could not prevent the increase in gasoline, diesel and illuminating paraffin. Petrol jumped R2.43 per liter for 93 octane unleaded fuel. André Cilliers of TreasureOne told BizNews that the increases will have a severe impact on our rate of inflation and growth, and that the poor will be particularly hard hit because they have no other form of public transportation. However, there is a silver lining for our currency. –Linda van Tilburg
The increase in fuel prices will have a significant impact on our inflation rate and will have a direct impact on disposable income
What’s happening with the rand and the price of oil, it’s all linked and part of it revolves around the fuel tax which was reduced for us two months ago and resumes from June 1st. This will have serious repercussions on what we can expect from our inflation rate. Inflation takes money out of people’s pockets. The fact that they have to pay more for fuel is a direct hit in their pockets. We had a 50 basis point increase in interest rates for home loan holders. It’s a direct hit to their disposable income and it just means the consumer is under a lot of pressure in South Africa. And the further down the income line you go, the more serious it becomes for people; and ultimately you’re going to wreak havoc in terms of what happens to our economic growth, which has already been degraded.
So things are not going very well. And if you look at the price of oil and the forecast for the price of oil, we are at the level of $20 a barrel, which is already more than the average price for the month. So, in other words, you are going to start the month off on the back foot and the forecast is that it will go further to the $150 and $140 a barrel level. All of this has to do with Russia’s oil supply being lower than it used to be. We are not seeing any increase in the production of strategic reserves in the Middle East that have been released by some countries, particularly the United States. This was by far not enough to help with the oil supply. So things are looking bad and we know that all over the world we have an inflation problem, and that will only contribute to that problem. What we can say is if you look at the increase in the price of oil without a drop in demand; it just means that for every barrel of oil you imported – for which you paid $100 – you are now buying for $120. That’s $20 more a barrel to buy on the open market. This puts pressure on the exchange rate because the cost of your imports is much higher, and the cost of imported food and transportation costs will be much higher.
Consumers will be under pressure, but there’s a silver lining for the rand
If economic growth and consumer demand decline because they are under severe pressure; Eventually, there will be a drop in the demand for imports of oil and other products, because the consumer simply cannot afford them. This in itself is very negative for economic growth. But in the end, it’s slightly positive for the exchange rate. And it’s interesting. A lot of people think that in good times your exchange rate should strengthen but that’s actually when it weakens because imported goods are so much more expensive because people are spending more . So the opposite is true; the lower your economic growth, the better the exchange rate because changes in your terms of trade lead to more exports and fewer imports.
Increase in Fuel prices would hit the poor hardest
An increase in the price of fuel will have a direct impact on taxi users due to the public transport system. There are no trains or trams. So it is very bad for South Africans, especially for the poor. They have to go to work to earn money so they can buy food. Now a much larger percentage of their money is spent on work and food. This has a very bad impact on South Africa. Yes, we talked about it and it was me who said, you know, fuel levels in South Africa are not always that high, but there is a very unequal distribution of wealth. The impact of this on the poor in South Africa is far greater than in other first world countries.
In South Africa, if the price of fuel increases by 15% and 20% at the same time, it will certainly have an impact on what happens to people’s income and it will have an impact on their socio-economic status. This can lead to riots etc. as the impact is at the bottom of the chain.
Rand levels between $15.80 and $15.90 expected due to dollar strength
So far, we have seen the rand come back from the R16.25 levels; it was around R16. 50 and we had seen it come back. We traded as low as R15.45, R15.50 and R15.46 yesterday. But it wasn’t because of the strength of the rand or because of interest rates in South Africa or anything. It was linked to what happened internationally with regard to the value of the dollar. We had seen the dollar move from the $1.05, $1.045 levels against the euro, near the $1.08 levels. It’s lower again now, but it approached the $1.08 levels and that’s when the rand also made its way internationally. All emerging markets did quite well during this period as the dollar lost a good deal of its value. But it is already turning around and we are below the $1.07 levels. We can expect the rand to come back closer to the $15.80, $15.90 levels simply because of the strength of the dollar. And the strength of the dollar is closely tied to what’s happening with US interest rates and its inflation is still under heavy pressure. We saw in the minutes of the Federal Reserve meeting; it’s pretty unanimous from everyone at the Federal Reserve that the next interest rate hike will also be 50 basis points in an attempt to rein in inflation which is consistently high at those levels.
Pressure easing at Chinese ports, bodes well for South Africa and other emerging markets
I think we have to watch closely what is happening in China. China is breaking out of some of its blockages and opening up the markets. This again puts pressure on the price of oil, as the demand for oil from the Chinese side is increasing. But it just means that their demand for products is increasing because they imported less and exported less. For trade to return to markets and help economies. It normalizes situations and there could also be normalization on the logistics sector in the sense that ships can enter ports and unload; the containers will become available because the turnaround time becomes shorter because the ports are actually working. So, watch carefully what happens in China as it could bring some positivity back to the economic growth sphere across the globe and could bode well for South Africa and emerging markets.
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