Fuel to the fire

Mo­torists un­der pump, gov­ern­ment on cliff

Sunday Times - - Business Times - By ASHA SPECKMAN speck­[email protected]­day­times.co.za

● 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.

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