South Africa’s capital markets began what could be a tough week on the back foot as both the rand and stocks on the JSE traded lower due to concerns about the impact of rising oil prices on the inflation outlook and interest rates.
The rand breached R19-mark to the US dollar on Monday as markets continued to worry about the deterioration in South African government finances from overspending in a weak economy.
Statistics SA is expected to release data on the August headline consumer inflation while the SA Reserve Bank (SARB) will announce its latest interest rates decision.
The central bank is expected to keep rates unchanged but remain hawkish on the back of concerns of an uptick in inflation driven by the higher fuel price.
The US Federal Reserve (Fed) is also expected to leave US interest rates unchanged this week, and cut interest rates next year. A Fed hike this week would most likely cause rand weakness.
Investec chief economist Annabel Bishop said a more dovish Fed than expected would likely cause some US dollar weakness and so rand strength against the US dollar, with a more hawkish US monetary policy tone having the opposite effect.
Bishop said the rand was heavily oversold, with fair value closer to R15 to the greenback, and the domestic currency was likely to strengthen next year as the US starts cutting interest rates, which, in general, should boost emerging market currencies.
“September to date has seen some lift in commodity prices, particularly metals and industrial prices, which would typically strengthen the rand, but the poor state of government-owned electricity and freight utilities has dulled the benefit,” Bishop said.
“The rand will indeed be at risk of the government-determined factors both this year and next, as the fiscal deficit is widening, while rapid repair to Transnet’s rail lines is not occurring, and load shedding stifles economic growth and exports.”
This rand’s weakness comes as the global price of Brent crude oil rose towards $95 (around R1,805) per barrel yesterday, hovering at the highest levels in more than 10 months amid expectations of a widening market deficit in the fourth quarter due to extended supply cuts by Saudi Arabia and Russia, as well as hopes of a demand recovery in China.
Brent crude oil prices have risen by about 18% since July’s interest rates decision by the SARB, while the rand has weakened by 2.1% in trade-weighted terms.
Global oil prices have risen from $74 per barrel at the start of July to above $92 per barrel recently, driving up administered prices which, in turn, raises inflation.
Bank of America’s sub-Saharan Africa economist Tatonga Rusike said yesterday that they were expecting inflation to trend upwards from 4.7% in July to 4.9% in August and 5.4% September on higher fuel and food prices.
“The good news on CPI deceleration year-on-year – from 6.3% in May to 4.7% in July – is likely over,” Rusike said.
“Upside risks abound over the next couple of months, particularly from fuel and food, which should lead to a small CPI uptick to 4.9% year-on-year in August before a big sting of 5.4% in September.”
As a result, retail fuel prices are set to rise sharply in October, having already increased in September and August too, a fresh blow to consumers and business.
Unaudited fuel data from the Central Energy Fund (CEF) is indicating an increase to petrol of around R1.20/litre and an increase to the wholesale price of diesel of as much as R2/litre.
According to the CEF’s data, the main driver behind the potential increases was higher international oil prices, which have climbed substantially since August, mainly on the back of reduced output by major oil producing nations.
“Should these significant increases materialise, they will push fuel prices to levels last seen in July last year, stretching the personal finances of South Africans even further,” the AA said.
Old Mutual Wealth investment strategist Izak Odendaal said though some were predicting triple-digits price increases, it was hard to tell since the oil price seemed to be driven more by geopolitics than by strong demand.
Odendaal said that in South Africa this was further compounded by the rand’s weakness against the dollar, but the SARB would likely keep interest rate hikes on hold for now.
“Despite the softer rand, higher petrol price and wider current account deficit, the Reserve Bank is unlikely to increase the repo rate this week, but these factors do mean that the bar for cutting rates is higher,” Odendaal said.
“At 8.25%, the repo rate is already much higher than inflation of 4.7% and therefore well in restrictive territory, meaning that it is acting to cool demand in the economy. Higher rates are not needed.”