R3 per litre pain for South Africa is coming
The R3 per litre fuel levy relief granted to South African motorists in April is going to come back to bite, one way or another.
No more relief of the same kind is currently expected—but even if it were, it would just delay the inevitable.
This is the warning from Investec Chief Economist Annabel Bishop, who says that the longer the US-Iran war continues, the harder local inflation will be hit.
That, in turn, will lead to interest rate hikes—even above the one that is now expected in May—as the South African Reserve Bank (SARB) moves to its 3% target.
In a note on Monday (13 April), Bishop said it is not currently the expected case that the fuel price under-recoveries building for May will be the ultimate outcome.
Data from the Central Energy Fund, before the announcement of the US blockade, showed that fuel prices were carrying significant under-recoveries of R3.40/litre petrol and R10.15/litre diesel.
“If this occurred—which is not the expected case—it would add 0.6% m/m to CPI inflation,” Bishop said.
This 0.6% m/m contribution to CPI inflation in May—which is, again, not yet the expected case—would push May’s CPI inflation rate to 4.2% y/y, instead of the 3.7% y/y currently forecast, she said.
For the quarter, CPI inflation would be 4.0% y/y, up from the current 3.5% view.
Bishop said that such an outcome would increase the likelihood of a 25bp hike to interest rates in May, instead of in July as Investec currently forecasts.
“The Forward Rate Agreement curve currently indicates a full chance of a 25bp hike in the repo rate in May now, having risen from last week when the ceasefire was announced between the US and Iran, and a hike in July was anticipated instead,” she said.
“That is, market expectations, which are very changeable, have now brought forward the interest rate hike expectation from July to May.”
There is no escaping the pain
Crucially, the current scenario planning and modelling does not take into account government intervention—previous or forthcoming.
For the April fuel hikes, National Treasury provided some short-term relief by cutting R3.00 per litre from fuel taxes—specifically the general fuel levy.
However, this has done nothing to counter the massive increases building for May.
In addition, this relief came at a cost: R6 billion, which the Treasury made explicitly clear was budget-neutral, meaning it would be recovered later.
While certain sectors have been calling for the relief to be extended or even expanded, Bishop noted that the reality is that this effectively creates an even bigger budgetary debt that will have to be collected.
If the National Treasury once again delivers a R3.00/litre reduction in the general fuel price levy—which Bishop stresses is not expected—it would cost a further R6 billion to the fiscus.
“This means that there would then be a total of a R6.00/litre cut in the general fuel price levy to unwind or push back into the fuel price for consumers, instead of the current R3.00/litre,” she said.
This would delay the reduction of inflation further.
Bishop said the R3.00/litre cut in the fuel levy in April has to come back into the system for consumers for both diesel and petrol.
This will either be as a fuel price hike, or the removal of part/all of a future fuel price cuts, keeping inflation elevated.
“A lengthier unwinding of the war in the Middle East is the clear risk for South Africa’s inflation, interest rates and other economic metrics,” she said.
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