What fuel's vicious cycle means for South Africa

South Africa finds itself caught in an almost perfect storm on two major interconnected issues – a substantially weaker currency and the considerably more expensive price of oil. And both sides of this equation are problematic, as they both feed off each other in a vicious cycle. 

As a net importer of fuel, South Africa is facing immense pressure. Massive petrol hikes affect every consumer, business and the broader trade linkages across the country's economy.  

Supply constraints from the Organization of the Petroleum Exporting Countries (OPEC), Venezuela's current political crisis, and renewed tensions between the US and Iran all are factors well beyond South Africa’s control. As a result the AA is warning of further – and potentially damaging – fuel price hikes next month. 

The effects of fuel price increases on South Africans are dramatic. In particular, Apartheid-linked spatial planning in our major urban centres continues to mean high transportation costs for workers who have to pay more for taxis, busses and other forms of road transport. South Africa’s poor are especially vulnerable to fuel price changes leaving their disposable income further squeezed. 

Ripple effects 

While there are many problems in the domestic economy, the recent GDP figures highlighted a fall consumption expenditure which will already have been, in part, as a result of earlier fuel price hikes. This has a ripple effect across a wide swathe of businesses and will strain our ability to recover from the technical recession. 

Whilst consumers are feeling the effects of multiple price increases in transport and disposable income terms, another key danger is in the overall cost structure of critical industries like agriculture. Second quarter GDP figures already showed a substantial weakening in this sector. Additional fuel price hikes will strain input costs further, potentially contributing to rising food inflation. 

And there's the real rub. Rising fuel costs are felt directly at the pump, for those using public transport and again by those purchasing a wide variety of goods and services where fuel is a cost component. It is as if South Africans will be hit with yet another indirect tax on just about every item they put into their food basket.  

As if this is not enough, higher inflation puts pressure on wages. This is particularly concerning in the public sector where cash-strapped government coffers can barely afford to cover current wage levels. 

The knock-on dangers continue with rising inflation and the need – potentially – to raise interest rates to ensure the country does not move beyond the Reserve Bank’s inflation band of 6%. For this reason, government took the unprecedented step of partially subsidising the recent oil price rise to the tune of some R400m for the month of September.  

This type of temporary rescue package is financially draining and unlikely to be applied with any regularity. Rather, it has been strategically implemented to attempt to offset the effects on inflation with the hope that any rand strengthening, and fall in the price of Brent Crude moderation could stabilise matters. 

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Make no mistake though, this is also a political issue that does not play well for the ANC as it approaches a tough election campaign over the next 10 months. With fuel affecting voters' pockets, shrinking disposable income can produce shrinking results for the governing party at the ballot box. South Africans are already frustrated given the broader economic malaise and need little trigger to further vent their anger.  

Few options 

Unfortunately, there are few options available for any short-term relief. Government could make concessions by reducing the fuel levy that was itself raised as a desperate measure to plug the fiscus in the band-aid-Budget in February. But, it would need to find the cash elsewhere and would not want to increase debt in order to do this – especially as those pesky ratings agencies will look askance at this. 

Another way to stabilise the currency is to raise interest rates. Indeed, in comparison to fellow emerging market countries Argentinaand Turkey, our rates are low. But a rate rise would again have a negative effect consumers - with debt, and put a dampener on the broader business environment in terms of expansion and growth. It is this consideration that would have to be weighed should the fuel price point inflation towards the danger 6% level. 

Another economic ‘elephant-in-the-room’ is a further series of rises in US interest rates over the next few months. This would have a negative effect on the rand and may indeed push South Africa to consider a rate increase to shore up the rand and, by implication, inflation. 

These are tough times for the domestic economy and for the average South African. Long-term solutions such as developing shale or increasing our energy reliance on gas are far away. 

A bigger problem for South Africa is that our war-chest is depleted. With growth so low, and tax receipts expected to reflect this next year, ongoing fuel price subsidisation is not really sustainable. Consumers could get other forms of symbolic relief via extending zero-rate exemptions from VAT, but the fuel hikes are likely to continue until the emerging market currency contagion abates.  

Ironically, a global economic downturn or even recession – which may well be on the medium-term horizon after almost a decade of US growth and with increasing trade tensions - would soften oil prices.  

Still, South Africa needs a holistic economic policy review to restore growth and confidence. This cannot come soon enough. Without it, external factors will continue to gnaw away at our potential for recovery, keeping us vulnerable.

We need to fight these pressures with innovation of our own and the time is now.