South African consumers have been dealt a triple blow by increases in the petrol price and electricity rates, compounded by a depreciating rand.
The department of energy said ahead of this week’s petrol price hike that “there is no need to panic at this stage”.
“The price of petrol decreased by R4.02 [between] July last year [and] February 2015 and, taking the current increase into account, a litre of petrol is still R1.50 cheaper than it was in April last year,” it said. Petrol in Gauteng now costs R12.89 a litre, compared with R14.39 in April 2014.
The department said the fuel price increase was driven by local and international factors. South Africa imports crude oil and finished products at a price set at international level using the dollar “and the depreciation of the rand against the dollar during the period under review is the reason we are doubly hit”.
Local factors responsible for the R1.62 (95 octane) and R1.56 (93 octane) hike in the petrol price include the 80.5 cents a litre increase in fuel levies and the Road Accident Fund levy introduced by Finance Minister Nhlanhla Nene in his February budget speech.
The recent weakening of the rand not only has a direct effect on the petrol price, which is set in dollars, but will also have a negative effect on inflation – the price of goods and services in the country.
Reserve Bank governor Lesetja Kganyago said the risks to the inflation outlook were now on the upside.
“The lower trend in inflation was mainly due to lower petrol prices, but recent oil price and exchange rate developments suggest that this is likely to be the low point for the medium-term inflation trajectory,” said Kganyago.
He said the volatile rand/dollar exchange rate was the result of global trends, particularly the possibility that the United States Federal Reserve would increase interest rates.
“When it happens, it is expected to put the currency under more pressure” because foreign direct investment was likely to redirect funds from emerging markets to developed markets, he said.
Eskom increases another major blow
With the rand under severe pressure and the recent increases in crude oil prices, another major blow to consumers will be Eskom’s average increases of 12.69% for direct customers and 14.25% for municipalities. In March, Eskom said its financial position did not allow it to prefund costs resulting from a constrained power system. These costs include short-term electricity purchases from independent power producers, municipal generators and the increased use of open gas turbines.
Investec economist Kamilla Kaplan said the increase in rand-denominated Brent crude prices, the sustained depreciation of the rand and increases in administered prices pertaining to electricity tariff hikes would affect inflation negatively. This, in turn, would affect wage settlements that exceeded inflation.
“This is where the pressures stem from. These risks have been factored into the [Reserve Bank’s consumer price index] forecasts, which were revised substantially higher to 4.8% in 2015 from a prior 3.8%, and to 5.9% in 2016 from a prior 5.4%,” she said.
The deterioration in the inflation outlook over the Reserve Bank’s forecast horizon – particularly in 2016, when inflation is projected to move closer to the upper end of the 6% target band – would reinforce the risk of a further hike in interest rates this year, putting consumers under even more pressure, Kaplan said.
Public sector unions under Cosatu are demanding a 10% wage increase – 5.9% above the current inflation figure of 3.9%.
Last week, the National Education, Health and Allied Workers’ Union (Nehawu) rejected the government’s proposed 5% wage increase. The public service department spokesperson, Brent Simons, said government was only able to offer what it could afford.
But Cosatu president Sdumo Dlamini said the federation would strike if the government continued to negotiate “in bad faith”.
If the unions succeed in pushing the public sector union wage bill above inflation, Lesetja warns that this would put pressure on the Reserve Bank to hike interest rates, which would put more pressure on the already cash-strapped consumer.