Fuel to the fire
Motorists under pump, government on cliff
● South Africa is on the brink of a fiscal cliff and unless the economy improves significantly the government could find itself in Washington, cap in hand, begging for a rescue package from the IMF.
While policymakers seek some room to tinker with levies such as those imposed on fuel to soften the impact of higher petrol prices on consumers, there simply is none.
The fiscus, according to a person close to the National Treasury, is in a “desperate” revenue situation.
“We are probably in a worse situation today than we were when government decided to go on Gear [the growth, employment, and redistribution strategy]. We should have been much more brutal, frozen salaries in the public sector. Our politicians don’t want to anger the unions.
“I’m beginning to feel that we’re almost going to go to the IMF because our politicians can’t make hard decisions.”
At the end of 2017, South Africa’s debt-to-GDP ratio sat at an all-time high of over 53%, compared to a record low of 27.8% in 2008.
A few successes
In 1996, the government created the fiveyear economic plan called Gear, which focused on privatisation and the removal of exchange controls.
The plan had a few successes, but would mark a breakdown in relations between the ANC and its alliance partners, the once-powerful Cosatu and the SACP, which were against it.
In the years after that economic policy, South Africa benefited from the commodity super-cycle inspired by Chinese demand for raw materials that are primarily found in emerging-market countries.
The cycle came to an end around the start of the decade and South Africa, along with countries such as Brazil, saw a marked decline in growth.
Locally, it’s been a period that has been characterised by policy uncertainty and governance collapse across state-owned enterprises that now hang like an albatross around South Africa’s fiscal neck.
Last week, President Cyril Ramaphosa created a task team to look into any possible interventions to soften the impact of fuel prices that are already at record levels — including the fuel levy, the fourth-largest tax contributor after personal income, VAT and corporate income tax.
No space to tinker
But the country’s desperate fiscal position leaves little to no space to tinker.
The levy, which makes up 5.5% of revenue, has become even more critical in the face of a potential dip in personal income tax as companies contemplate further retrenchments in a struggling economy. This week Impala Platinum, the second-biggest miner of the metal, said it may have to look at slashing more jobs on the back of low metal prices. It has already cut 2 500 jobs.
Proceeds from the levy may be less than the Treasury has forecast this year after the steep rise in fuel prices to above R16 a litre.
Economist Mike Schussler forecasts a possible R1-billion loss in revenues if demand for petrol drops as a result of high fuel costs, which happened in 2008. Fuel consumption that year fell 4.2% amid recordhigh international oil prices.
The Treasury collected R71.34-billion for the 2017-18 financial year, and it is predicting an additional R1.22-billion for 2018-19.
With several SOEs needing recapitalisation, a public sector wage bill that’s higher than what’s been budgeted for and a revenue shortfall of nearly R50-billion, the Treasury insider said: “We really are on the cliff edge. Two small shocks, even one, can tip us over.”
South Africa’s risks were all to the downside and while interventions to lessen fuel prices, such as tweaking wholesale margins, might bring marginal relief, the fiscal position was tight. “In any year you are going to have economic shocks. Now we’re not ready for any shocks. We are very vulnerable.”
The Road Accident Fund levy combined with the fuel levy make up R5.30 of the price of every litre of petrol sold.
Professor Hinaunye Eita of the University of Johannesburg’s school of economics, said consumer demand for fuel may be affected by higher prices but fuel remained a necessity. “Although the price of fuel may be expected to slow down demand, we expect this to be marginal.”
He said a reduction in the RAF levy may help reduce the price of fuel, but it was ultimately the creation of jobs and a broader tax base that was necessary.
Oil prices have risen 11% for the year to date, according to Iress data. The rand has fallen 9% against the dollar over the same period, resulting in higher costs for crude oil imports and fuel price hikes.
Elna Moolman, an economist at Macquarie Securities, said: “Our expectation is that oil prices will moderate somewhat, while we also expect the rand to strengthen further. In turn, we expect petrol prices to decline. This is crucial for the relatively benign inflation trajectory that we forecast.”
But, she added, if the rand remains at its recent weak levels and oil at its peak, inflation is likely to average 6.1% in 2019 — outside the Reserve Bank’s 3%-6% target — rather than the 5% that’s anticipated.