TICK­LING A NERVE

Thabi Leoka col­umn

Financial Mail - Investors Monthly - - Contents - THABI LEOKA Thabi Leoka is an econ­o­mist at Re­nais­sance Cap­i­tal.

Oil prices have fallen by over 50% since their high of $115.06/bl in 2014, bring­ing much de­light to oil-im­port­ing coun­tries such as SA. The most im­me­di­ate ef­fect of fall­ing oil prices on con­sumers is a decline in trans­port costs. The rand cost of a bar­rel of oil has halved since Au­gust 2014, im­ply­ing that the benefits of lower fuel prices should be a min­i­mum of R50bn (on an an­nu­alised ba­sis at cur­rent oil prices).

The sharp decline in the fuel price has pro­vided some respite to stretched con­sumers and the wind­fall should be en­joyed by all con­sumers, al­beit to vary­ing de­grees. Peo­ple in the lower in­come seg­ments typ­i­cally do not own cars, with up to 69% of in­di­vid­u­als us­ing taxis or other public trans­port ser­vices. Con­sumers who use public trans­port will there­fore be un­af­fected by lower fuel prices, es­pe­cially since taxi driv­ers and as­so­ci­a­tions sel­dom pass on lower petrol prices into fares.

The 30% of con­sumers who use pri­vate trans­port should be sav­ing about R450 or R900/month if house­holds have two ve­hi­cles, as many do in up­per in­come brack­ets. This could make a big dif­fer­ence to the ser­vice­abil­ity of their debt, although the ex­tent of this is dif­fi­cult to as­sess. Log­i­cally, if a house­hold is in ar­rears on any debt, the fuel sav­ings could al­low them to claw some of their way back; if any cash is left over af­ter that, it could spur spend­ing.

How­ever, I be­lieve the no­to­ri­ously un­der-saved South African con­sumer would sooner spend any cash wind­fall from lower fuel prices than save it or pre­pay any debt. The like­li­hood is there­fore that, for the vast ma­jor­ity of con­sumers, the ben­e­fit of lower fuel prices would re­sult in con­sump­tion, or in pay­ing down re­tail credit in or­der to con­sume.

At the mar­gin, lower fuel prices aid con­sumers’ debt af­ford­abil­ity, but I’d ar­gue that credit providers will con­tinue to be cau­tious in their sup­ply of credit into the mar­ket in the short term, wait­ing to see whether oil prices sta­bilise (and where) and to what de­gree this ac­tu­ally im­proves cus­tomers’ in­come state­ments. So I do not be­lieve there is space to raise ex­pec­ta­tions on credit growth at this junc­ture.

Lower oil costs are a boon for South African eco­nomic growth. In­fla­tion, which seemed to be head­ing up as the rand weak­ened, is also likely to be emas­cu­lated as long as oil prices re­main de­pressed (and the rand does not weaken fur­ther). This means be­nign food price in­fla­tion, of which the lower-in­come con­sumer seg­ments will be the pri­mary ben­e­fi­cia­ries. Lower in­fla­tion would also give the South African Re­serve Bank room to ma­noeu­vre, mak­ing in­ter­est rate hikes less likely.

The in­di­rect ef­fects of fall­ing oil prices will be ben­e­fi­cial for all in­come groups via trans­ported com­modi­ties, es­pe­cially food, as well as lower im­port prices. The food price out­look is also helped by fall­ing oil prices, given that oil is an im­por­tant in­put to food pro­duc­tion and also a sub­sti­tute for bio­fu­els, mak­ing it the sin­gle most im­por­tant long-term driver of food prices over the past 10 years.

The big ques­tion ahead of the 2015 bud­get, in my view, is whether the Trea­sury will in­crease the fuel levy, re­vers­ing the benefits of fall­ing fuel prices that con­sumers have thus far en­joyed. Much has been said about In­dia’s re­cent fuel duty hike and com­men­ta­tors have mooted a sim­i­lar move in SA. The Trea­sury could use the fuel levy to raise ad­di­tional tax rev­enue, ef­fec­tively with­out an im­pact on con­sumers. In other words, the pump fuel price would not drop as much as is war­ranted by lower oil prices. This would have to be done care­fully, in my view, with the levy re­plac­ing lower oil prices so as not to cause an in­crease in petrol prices and po­ten­tially taxi fares — those same taxi fares that are un­likely to come down due to lower fuel prices.

And when oil prices re­cover, the ques­tion is whether any ad­di­tional levy would be reversed. In the­ory it should, in or­der not to in­flu­ence con­sumers and the econ­omy neg­a­tively. How­ever, re­duc­ing taxes or levies is usu­ally an unattrac­tive con­cept for gov­ern­ments that are peren­ni­ally short of money. Any ad­di­tional levy could there­fore have a danger­ous damp­en­ing ef­fect on the econ­omy over the longer term.

For the vast ma­jor­ity of con­sumers, the ben­e­fit of lower fuel prices would re­sult in con­sump­tion

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