ECON­OMY WATCH

Financial Mail - Investors Monthly - - Contents - L l l, l. l l- l, l l l

The most sig­nif­i­cant eco­nomic event slated for the South African econ­omy in the month of April is a R1,60/ R2/ hike in the petrol price. Even at the lower amount, this will be the largest monthly in­crease in the fuel price in rand terms in South African his­tory.

Around half of the in­crease is ex­pected to re­flect the fall of the rand against the dollar dur­ing March. The rest, a full 80,5c/ will ac­crue from the leg­is­lated in­crease in the fuel tax which kicks in on April 1. An­nounced in Fe­bru­ary as a key means of nar­row­ing the bud­get deficit, this mea­sure will take to­tal taxes on petrol from 332,5c/ to 413c/ in one swift step.

Ac­cord­ing to Davis Tax Com­mit­tee head Judge Den­nis Davis, the hike in the fuel levy was cho­sen over other po­ten­tial tax mea­sures for 2015-2016 be­cause of the room cre­ated by the steep decline in the in­ter­na­tional oil price over the past eight months.

In March, con­sumers paid just over R11/ for petrol (93 oc­tane in Gaut­eng). This was R3 less than the R14/ they were pay­ing in July last year be­fore the in­ter­na­tional oil price halved. This amounts to a 20% sav­ing on the pump price of petrol.

In April, if the petrol price climbs by Econometrix direc­tor and chief econ­o­mist Azar Jam­mine’s con­ser­va­tive es­ti­mate of R1,60/ the pump price will rise to R12,65/

This will roughly halve the sav­ing that con­sumers have en­joyed since last July.

But even if fur­ther rand weak­ness re­sults in pump prices ris­ing by as much as R2 to R13/ next month, con­sumers will still be pay­ing less for petrol than they were in July. This means con­sumer spend­ing will still re­ceive a boost from cheap oil, though not nearly as much as be­fore.

The im­me­di­ate im­pact of next month’s fuel price hike will be the re­ver­sal of re­cent gains in con­sumer in­fla­tion. Jam­mine ex­pects the con­sumer price in­dex (CPI) to fall be­low 4% in March but to be back up to 4,5% in April, purely on higher fuel prices.

The con­sen­sus is that CPI should then keep head­ing higher to­wards the 6% up­per limit of the tar­get band over the com­ing months, pushed up by higher elec­tric­ity tar­iffs and ris­ing food in­fla­tion. The lat­ter is climb­ing as a re­sult of the drought in SA’s maize belt.

April is the month when an­nual elec­tric­ity price in­creases are levied on busi­ness. Higher tar­iffs will hit con­sumers only in July, when they will ex­pe­ri­ence an ad­di­tional 12,69% in­crease on top of the 8% in­crease levied last year.

But the tra­jec­tory of the rand ex­change rate against the US dollar re­mains the key up­side risk to the in­fla­tion out­look.

At the time of writ­ing in mid-March, the rand had fallen to a fresh low of R12,37/$ in a pan­icky sell-off fu­elled by US dollar strength af­ter yet an­other month of ro­bust US jobs data.

There is con­cern that this sell-off may be a taste of things to come and that SA can ex­pect re­newed bouts of risk aver­sion to clobber the rand the closer it gets to the first Fed­eral Re­serve rate hike, now in­creas­ingly be­ing viewed as likely in June rather than in Septem­ber.

On the con­trary, says Rand Mer­chant Bank cur­rency strate­gist John Cairns: “It has taken two strong US non-farm pay­roll re­ports to bring for­ward the mar­ket’s tim­ing of a Fed hike to June, so [now that it is priced in] the risk for a fur­ther sell-off in the rand ac­tu­ally di­min­ishes.”

There are no spe­cific event risks for the rand in April since it falls be­tween meet­ings of the Fed and the South African Re­serve Bank’s mon­e­tary pol­icy

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