TICKLING A NERVE

Thabi Leoka column

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