State appeals to business to help cushion price hikes
The government will ask food retailers, producers and the transport sector to absorb higher prices in a bid to cushion the impact of fuel price and VAT hikes on consumers, who also face a potential interest rate hike soon.
This follows a backlash from civil society this week as petrol prices rose to a record R16 a litre at inland pumps.
The bulk of South Africa's crude oil is imported, mostly from Saudi Arabia, making the country vulnerable to world demand-supply dynamics.
Added to that is the effect of geopolitical events on the currency such as the trade spat between the US and China, resulting in the government paying more for fuel imports.
President Cyril Ramaphosa announced the government's intervention on Friday at a breakfast roundtable with business, ahead of the Brics summit later this month.
He has instructed ministers in the economic cluster to create a package of measures within the next two weeks and “thereafter embark on a programme of engaging with the business sector and find ways to ameliorate” the impact of fuel price hikes.
“South Africans are now suffering under the burden of the increases that have just been placed on their heads,” he said.
The package would include the urgent finalisation of an inquiry into products that should be added to the VAT exemption list, Ramaphosa said.
Currently 19 items, including brown bread and some fruit and vegetables, are exempt from VAT.
“We want to make a call to retailers, and particularly food processors, [to] hold back from imposing increases, particularly on food items and items that people use on an ongoing basis.
“Also those who are involved in the transport sector who are tempted to increase prices, to hold back,” he added.
But there seems to be confusion as to whether the government will extend the mandate of an independent panel which is reviewing goods zerorated for VAT.
Energy minister Jeff Radebe said in a separate briefing on Friday that the mandate could be expanded to include fuel price increases.
This contradicted a statement from the Treasury on Thursday denying an extension was being considered.
In an attempt to explain the contradictions, finance minister Nhlanhla Nene, who was also at the briefing with Radebe, said that because of the legal implications of extending the mandate, the Treasury had to issue a denial while the plan was under discussion.
“It is the intention [to include fuel in the VAT inquiry]. It is seen as the best vehicle of processing the views of the people and coming up with an informed position,” he said.
The fuel price hikes on the back of higher oil prices have stoked inflation concerns. International oil prices had jumped from less than $30 (R404) a barrel in January 2016 to an average of $77 (R1 037) a barrel last month.
Nedbank economist Isaac Matshego said: “With the latest developments [an interest rate cut] is definitely off the table . . . chances of an earlier hike are now much higher.”
The Reserve Bank might not hike rates at its meeting on July 16-19, especially if the rand traded in the R13.60-R13.80 per dollar range this week “because the rand still hasn’t stabilised”.
However, if the currency rose significantly above R14, this could trigger a hike in September. In May, the central bank expected a potential hike of 25 basis points in the second half of this year based on its inflation model.
Peter Worthington, an economist at Absa Capital, forecast inflation to remain within the target but said “upside risks have risen”.
“We think the bar to any nearterm move by the [Reserve
Bank] is high.
“We maintain our previous forecast that the next move will be a 25 basis point hike in September 2019, with another one to follow in March 2020,” he said.
Inflation touched a sevenyear low in April at 4.5%, easing further to 4.4% in May.
It remains to be seen how retailers will deflect the absorption of costs.
Matshego said: “We always see margin compression [in the food value chain] at such times because they cannot sacrifice market share.”
The costs are recovered from consumers when the cycle is more positive.
“If they are going to be compelled to absorb most of the increase, they have to find other ways of cutting costs, and hopefully that won’t mean that there’s job reduction.” —