FUEL price hikes will be the first major expense to hit consumers following the downgrade of the South African economy by global ratings agencies to junk status, analysts have said.
The South African Automobile Association’s (AA) mid-month data is forecasting the price of petrol to increase by up to 55 cents a litre in May, diesel by around 39 cents a litre, and illuminating paraffin by an estimated 41 cents a litre.
The association said the rand’s weakness contributed three-quarters of the expected fuel price increases at the end of the month, with hikes in international petroleum prices accounting for the balance.
The AA said if the rand had stayed on its previous upward course against the US dollar, it may have been strong enough to overcome the significant increases in international petroleum prices, resulting in a smaller increase in May.
“The loss of confidence by investors and the sovereign ratings downgrades by ratings agencies Fitch and S&P‚ have led to the rand slipping against the US dollar‚ down from around R12.35 at the beginning of the month to its current position of around R13.40‚” said the AA’s Layton Beard.
“However there is no certainty that the impact of the downgrades has been fully priced into the economy. The picture for May could be substantially different.”
Fuel prices hikes in South Africa usually have a knock-on effect on Lesotho due to the Mountain Kingdom’s economic dependence on its only neighbour.
Lesotho’s loti currency is also pegged to the South African rand on a 1:1 ratio. The rand has been battered by the credit downgrades of the South African economy by Standard & Poor’s (S&P) and Fitch to sub-investment grade earlier this month.
The decision follows a cabinet reshuffle by President Jacob Zuma which claimed the jobs of then Finance Minister Pravin Gordhan and his deputy Mcebisi Jonas. Mr Gordhan was replaced by former Home Affairs minister Malusi Gigaba.
The confluence of these downgrades could see investment decline drastically in the country, putting more pressure on the rand and inflation.
StanLib Chief Economist Kevin Lings pointed out that near-term inflation would rise due to the petrol price increase, while medium-term inflation would also go up due to the deteriorating currency.
Neil Roets, CEO of debt counselling firm Debt Rescue, also noted that the increase would have an immediate impact on the prices of virtually all other goods and services because the South African economy was largely powered by diesel and all goods transported by road would reflect this increase.
For his part, Mervyn Abrahams with the Pietermaritzburg Agency for Community Social Action noted the close relationship between fuel price fluctuation and the cost of food.
“Fuel has an effect right through the food production process because of transport, the price of plastic etc. It as an impact throughout the food process. We are expecting that times will get harder for working class and poor households,” he said.