Petrol prices could have dropped by R1.25 a litre this month – if it wasn’t for government
The government’s political missteps over the past month crushed the rand in global markets, almost halving the petrol price drop motorists will enjoy from Wednesday (7 June).
The Department of Mineral Resources and Energy announced on Monday (5 June) that petrol prices will decrease by 71 cents per litre and diesel by between 80 and 85 cents per litre this week.
However, according to Investec chief economist Annabel Bishop, the price drop could have been significantly higher – around R1.25 per litre for petrol and R1.38 for diesel – had the country maintained a stronger currency position.
The blame can be laid at the feet of the government and its tight relationship with Russia, which came to the fore in the past few weeks, damaging international sentiment towards South Africa.
“The past month has revealed the strong relationship South Africa’s government is reported to have with Russia on many fronts, including reportedly close military ties, at a time when the Western world has imposed sanctions on Russia for its war on Ukraine,” Bishop said.
“South Africa’s ongoing relationship with Russia, including through the BRICS grouping, sees the country scrambling to find a solution to the Russian President’s impending visit later in the year if SA hosts the BRICS summit.”
On the back of the news that South Africa granted diplomatic immunity to BRICS summit attendees while dithering on what it will do if and when Putin visits, the rand hit record lows last week, eyeing the harrowing R20 to the dollar mark.
South Africa is a party to the International Criminal Court (ICC), which has an arrest warrant against Putin for alleged war crimes.
If he attends the BRICS summit in person, South Africa has no choice but to arrest him. However, the government has not delivered an official position on the matter, looking for loopholes to get it out of the predicament.
The rand pulled back towards R19.40/USD on Monday, which Bishop attributed to discussions that the BRICS meeting could be hosted in a different country to avoid the problem of the ICC ordering Putin’s arrest.
However, this slight relief did not come in time for market changes to reflect in June’s petrol price adjustment.
“If the rand had not weakened over May, prices would be set for a drop of R1.25/lite for petrol, and R1.34/litre for diesel this month instead,” Bishop said.
“The inflationary effect of rand weakness cannot be underestimated, negatively impacting living costs, particularly the lives of the poor whose biggest expenses are typically travel and food, both afflicted by the rand’s severe depreciation against the US dollar.”
Investors flooding out
Bishop said that South Africa’s geopolitical choices – and particularly the revealed strength of its relationship with China – has seen the rand collapse and substantial foreign selling of the country’s financial assets as Western financial market players punish South Africa for its deteriorated risk environment – including its perceived significant allegiances to Russia.
The economist noted that foreign investors have dumped over R20.3 billion worth of their South Africa bond holdings this year so far – more than the R19.6 billion sold for the whole of 2022,.
Bishop said this stands in stark contrast to the approximately R0.1 billion worth of local bonds sold in 2021 after purchasing R76.7 billion in 2019.
“High levels of electricity load shedding have decimated the economic growth outlook for this year, and so have weakened the fiscal revenue collection potential of the country, which has also negatively affected sentiment in the bond market,” she said.
This was flagged by the South African Reserve Bank last week in its financial stability review, where it added Pretoria’s position on Russia as a new risk in its assessment – cautioning on potential secondary sanctions and the impact it would have on the local economy – as well as increased capital outflows as a result.
“South Africa’s non-aligned stance in the war between Russia and Ukraine is increasingly being questioned, which may pose a future threat to the participation of South African financial institutions in the global financial system and increases the likelihood of secondary sanctions being imposed on South Africa,” the SARB said.
Bishop noted that, for South Africa’s financial markets, economic activity and investor sentiment, the South African government is seen to be increasingly “playing with fire” in its still close relationships with Russia, while the Western world has taken a strong stance against Russia due to the Ukraine war.
“Negative international financial market sentiment increases towards South Africa as it shows ongoing alliances with Russia by allowing Russian ships to dock at SA ports, conducts naval exercises with Russian and Chinese fleets and sends delegations of South African government officials to Russia,” she said.
The rand is the third worst-performing emerging market currency against the US dollar out of a basket of twenty-two monitored by Bloomberg, weaker by -20.8%y/y, after the Turkish lira and Argentina peso.
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