Cape Town – A fuel price hike in May would have an immediate impact on the prices of virtually all goods and services, said Neil Roets, CEO of debt counselling firm Debt Rescue.
The Automobile Association’s (AA) mid-month data issued on Tuesday is forecasting petrol to increase by up to 55 cents a litre in May, diesel by around 39c/l, and illuminating paraffin by an estimated 41c/l.
The recent downgrade of South Africa’s sovereign credit rating to sub-investment grade by Standard & Poor’s Global Ratings and Fitch Ratings has thrown financial markets into turmoil, although the rand has regained some of its initial losses, trading around R13.36 to the greenback on Tuesday morning.
The currency, however, has depreciated significantly since President Jacob Zuma’s midnight cabinet reshuffle on March 31, removing key ministers, most notably former Finance Minister Pravin Gordhan and his deputy Mcebisi Jonas.
In addition to rand depreciation, which will increase imports and negatively impact inflation, the credit ratings downgrade will also lead to a decline in business and consumer confidence, resulting in lower investments and spending.
Roets said in a statement on Tuesday that the fuel price increase is the “first of the dominoes to fall”.
“The increase in the fuel price is almost entirely due to the drop in the rand as crude oil prices had actually come down slightly over the past month,” Roets said.
A petrol price increase will have a ripple effect throughout the economy, because the South African economy was largely powered by diesel, Roets said. “All goods transported by road would reflect this increase.”
Roets expected the rand to decline further in value against the dollar, which is going to impact on “everything” – from fuel to food because although South Africa is more or less self-sufficient in grains, all of the inputs such as fertiliser, pesticides and diesel have to be paid for in dollars.
“Growing unemployment and a slowdown in our already abysmal growth rate of 1.2% will soon follow as foreign investors seek greener pastures.”
Consumers feeling the pinch
Lesiba Mothata, chief economist at Investment Solutions, told Fin24 the fuel price hike is “going to bite”.
“The environment is really not complimentary toward household incomes. Average earnings growth in the private sector, including bonuses, used to average about 4.5%, but has now declined to 2.6% in the past year,” he said.
“It means income is not growing while inflation is likely to remain high.”
Mothata cautions that an important point people haven’t applied their minds to is the proposed removal of zero-rating on fuel, which was announced in the 2017 Budget. The proposal, intended to further expand South Africa’s tax base, will be subject to consultation leading up to the 2018 Budget.
Government said to mitigate the effect on transport costs, government will consider combining this with either a freeze or a decrease in the fuel levy.
Mothata said if this proposal is implemented it could mean a more elevated inflationary environment.
“This, combined with constrained nominal income growth point to a very dire outcome for consumers who are already feeling the pinch.”