Johannesburg - South Africa’s joy at the incoming drop in the price of petrol could be short-lived as the Reserve Bank mulls over interest rates next month and food inflation is set to increase as a result of the drought.
On Friday, the Department of Energy announced that the price of petrol would decrease by 69c a litre and diesel by more than 50c a litre on Wednesday morning.
But economists warned that the respite might not last long as the rand looked set to remain vulnerable and the crude oil prices continued to show an upward trend.
Econometrix economist Azar Jammine said most economists had anticipated a 72c a litre drop in the petrol price, but the fact that it was only reduced by 3c a litre less showed just how the volatility of the currency could influence most decisions in a short time and impact on the entire economic outlook going forward.
Jammine said this put the Reserve Bank in a difficult position when considering its monetary policy stance next month. “It is a difficult position because it has to balance its concerns on the volatility of the currency with the difficulties the economy may encounter if it were to increase interest rates,” Jammine said.
“This may result in consumers cutting down further on their spending and could stifle the economy even further,” he said.
Friday’s announcement of the fuel price drop this Wednesday came in a week of high drama in which the economy plunged into further crisis with news that the gross domestic product, the broadest measure of the value of all goods and services produced within the country, contracted by 1.3 percent, the business confidence index remained bleak and the rand fell to R14, its lowest level ever against the US dollar.
Although the rand clawed back some gains to close at R13.3097 on Friday, concerns remained on the medium to long-term prospects of the economy with commodity prices still depressed.
Analysts pointed out that persistent power cuts and lack of clear direction from President Jacob Zuma’s government were the main reasons for the economic paralysis.
The drought in the country’s major food-producing provinces together with a lack of clear strategies to stabilise the mining industry and boost foreign investments could add further woes to an economy that is already battered.
ETM market analyst Ricardo da Camara said the situation would send worrying messages to potential investors and slow growth of an already battered economy. Da Camara said all these pointed to structural problems that could force the currency into a crisis.
“If we remain at the current volatility level we could be in for a tough ride going forward,” said da Camara.
“It (the rand) might have recovered slightly, but the pace at which it is depreciating against the major trading currencies points to a crisis that could be with us before we even know it,” he added.
The Transvaal Agricultural Union of South Africa said it should be the government’s priority to stabilise the economy and ward off the threat of recession.
Union president Louis Meintjes said the government should start in areas that it had control over. “The government should contribute to lessen the impact of excessive wage demands and minimum wages,” he said.
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