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