News in South Africa 19th February:
1. Petrol price storm approaches:
South African consumers are heading into a fuel price storm, with a petrol and diesel hike coming in March, possible fuel tax hikes in April, and the wider impact on transport, shelf prices and inflation likely to be felt in the months that follow.
According to the latest data from the Central Energy Fund, petrol and diesel prices are lined up for hikes of around R1.30 per litre and up to R1.50 per litre, respectively, hitting in a couple of weeks.
Higher global oil prices – driven by conflicts and tensions in the Middle East and the impact on demand – as well as a generally weaker rand, trading around R19 to the dollar, have dealt a double-blow to price recoveries, leading to the likely hikes.
Economists, meanwhile, expect that Finance Minister Enoch Godongwana is likely to announce an inflation-linked increase in fuel takes during his budget speech this week, after skipping hike for two years in a row.
The General Fuel Levy is currently at R3.95 per litre, while the Road Accident Fund is at R2.18. Should a CPI-based hike come through, motorists could expect to be paying in the region of 27 to 37 cents per litre more in taxes come April.
While fuel price hikes are painful enough for motorists and those who use public transport, the hikes send shockwaves across the retail sector – particularly the freight businesses that deliver goods throughout the country.
Road Freight Association (RFA) CEO Gavin Kelly that, given the high cost of fuel, companies in the sector will likely have to increase their pricing to cover these increasing costs – which will invariably feed into the entire value chain.
“Any gains achieved in mid-2023 are steadily being eroded,” he said.
“Whilst we have seen fuels coming off the huge highs in 2022 and 2023, prices are definitely not where the local economy would like them to be.”
Kelley said that the continuous increases in the price of fuel inevitably drive the cost of transport and logistics up – step by step – and with roughly 85% of all goods moved through and around the country having a road leg at some part in the journey, there will be increases to consumers as the cost to transport goods increases.
“Fuel is fast crossing the 50% mark in daily transport operating costs, which remains a high operational input cost for any company or business that requires goods to be transported to manufacturing, processing, packaging, taking, distribution or retail operations.
“That cost will – in most cases – be borne by the consumer who will continue to feel inflationary price pressure in the short- to medium-term.”
The freight CEO said that, in the short term, general transport costs will rise – from food to fuel, from clothing to electronic goods and everything in between.
“There will be the inevitable price escalations – some immediately, but more so, a domino effect will ensue, the next in a long line of such domino effects that we have seen too often in the last few months.”
2. Budget speech critical for investors:
The budget speech this week is more critical than ever to business sentiment. The financial performance of government has been a material risk that has at times damaged South Africa’s investment case. The rapid deterioration of the fiscal position during the Zuma years triggered fears that we were on a terminal path to bankruptcy.
One of the achievements of the Ramaphosa government has been to restore some trust in the ability of National Treasury to run the finances of government. There has been a clear effort to rein in spending and turn the trajectory. The challenge is that our economy has not cooperated. From the Covid lockdowns to load shedding and the logistics crisis, growth has consistently disappointed. That means the revenue side of the equation has not been able to deliver enough money to fully restore government finances. As a result, the time at which revenue will exceed expenses before interest payments (the so-called “primary surplus”) has consistently drifted outward, while gross debt as a percentage of GDP has continued moving upward.
This will be a key indicator we will be watching in the budget speech. Just when is this point of primary surplus going to be achieved? It was meant to happen in the fiscal year ending now, but with revenue under pressure there are doubts it will succeed. If it does not, eyes will turn to whether it can in the year ahead, requiring clear spending discipline.
Finance minister Enoch Godongwana must make the case that Treasury will succeed, despite the myriad spending pressures it faces, especially in an election year. There has also been much noise about using the country’s foreign reserves to help relieve pressure on government finances. If that is going to happen it must be with strict and credible conditions, that make clear that the function of foreign reserves is to protect the country from international crises and maintain its credibility in the international financial system. It is not a free money pot for government bailouts.
Another important issue we will be watching for is government’s efforts to drive infrastructure investment. We have for many years heard a lot about it, but it still isn’t happening. Public spending in particular has continued to decline throughout the period, while the private sector has been picking up the slack. That is largely a result of the financial collapse of Eskom and Transnet, but core public sector investment has also been weak. So, while spending needs to be constrained, if we want to turn the trajectory of overall GDP growth, it is important that we are investing in our economic capacity and ensuring the state can provide essential services like water and roads.
Treasury has been working on reforming the regulations for public-private partnerships to make them easier to use. This process has been going on for some time, and it would be good to see clear announcements of changes to the regulations in the Budget. This would enable the private sector to become much more active in investing in public infrastructure, without putting government finances under strain. Perhaps we will hear more of the Infrastructure Finance and Implementation Support Agency that was announced in the MTBPS but with little detail. This may be a positive intervention to promote better use of PPPs.
It is important to temper expectations of what the Budget can do.
Gone are the days when National Treasury simultaneously held the levers of key policy interventions to support growth, as well as the levers of government spending. The economy now depends on many parts of the state machinery pulling together, with Treasury only able to hold the purse strings. It is broader economic policy that is the ultimate way out of the low-growth mess we are in, even though sound fiscal management is a critical part.
3. Warning over foreign reserve use:
Economists and business leaders are urging caution if the National Treasury intends to tap South Africa’s foreign exchange reserves to boost the country’s finances, saying that if it’s done, it needs to be done right.
As the 2024 Budget Speech draws closer, there is increased speculation that Finance Minister Enoch Godongwana may turn to the Gold and Foreign Exchange Contingency Reserve Account (GFECRA) to plug South Africa’s growing budget deficit.
The R500 billion reserve, managed by the South African Reserve Bank (SARB), is made up of gold and foreign exchange reserves and kept as a contingency tool to ensure stability in financial markets or meet any unexpected economic challenges.
However, while economists have been pointing to the reserve since mid-2023 as a possible means to ease the budget deficit, this comes with the important warning that it needs to be used to address South Africa’s growing debt – and not to fund more government spending.
According to Business Leadership South Africa (BLSA) chief executive Busi Mavuso, if the National Treasury uses the reserve, it must come with strict conditions.
“It is not a free money pot for government bailouts,” she said.
“If (the reserve is used) it must be with strict and credible conditions that make clear that the function of foreign reserves is to protect the country from international crises and maintain its credibility in the international financial system.”
This was also emphasised by Standard Chartered’s chief Economist for Africa, Razia Khan, who said that use of the fund should go towards paying off debt.
Speaking to BusinessLive, Absa senior economist Peter Worthington, shared similar sentiments, saying that if the reserve is used, the market will likely only see it as a net positive if the fund is tapped “conservatively” and does not leave the SARB in a more volatile position in the long run.
It will also only be positive if the proceeds are used to replace expensive borrowing – and not boost government spending, which is already too high, he said.
South Africa’s fiscal deficit is expected to reach 4.9% in the 2024 financial year (from previous projections of 4.2%) and is only anticipated reach 4.2% (4.0% previously) in FY25.
The key drivers behind the poor outlook for the deficit boil down to the fact that the country is simply not bringing in enough revenue – with tax collections expected to fall short by close to R100 billion versus 2023 projections (R40 billion from MTBPS projections) – while government spending expands.
With 2024 being an election year, there are doubts that Godongwana can effectively rein in government spending, hence the focus on contingency plans, including the use of the GFECRA.
Godongwana will present the 2024 budget on Wednesday (21 February).
4. Mining sector retrenchment:
Anglo American Platinum has proposed a restructuring of its business that may affect about 4,300 jobs across its South African operations.
The so-called section 189A process involves a consultation period with trade unions and affected employees and will be facilitated by the Commission for Conciliation, Mediation and Arbitration, the Johannesburg-based company said in a statement Monday.
Only when the consultation process is concluded will the final number of affected jobs be known.
In parallel, Amplats, as the company is known, has initiated a contractor-vendor review process that could affect 620 service providers.
The move comes amid a 35% decline in average platinum group metal prices last year, which resulted in a 71% year-on-year fall in headline share earnings for the 12 months ended December to R53.30 per share, announced today.
Amplats’ full-year results are lower than the consensus of R60.15 per share.
Amplats, owned 79% by Anglo American, said it had issued a Section 189 notice in terms of South Africa’s Labour Relations Act detailing a possible impact on 3,700 full-time employees and 620 contractors across the group’s production base.
The potential restructuring affects 17% of Amplats’ total 22,000 full-time employees.
In December, Amplats announced plans to save R10 billion this year, including R5 billion in operating costs.
“We responded rapidly throughout 2023 and are working hard to reposition the business to address both the global and local challenges that currently face the PGM industry,” said Craig Miller, CEO of Amplats.
“It is clear to us, however, that the extensive range of actions we have already taken do not go far enough.”
5. Visa corruption investigation:
President Cyril Ramaphosa has authorised the Special Investigating Unit (SIU) to investigate allegations of maladministration in the issuance of visas by the Department of Home Affairs.
The probe will cover 20 years and focus on corporate visas, work permits, permanent residency, and the naturalisation of foreigners.
According to a proclamation issued by Ramaphosa on Friday, the SIU will also investigate allegations of “improper conduct” by some in the department’s ranks
All information sourced from articles posted by: BusinessTech, Moneyweb, DailyInvestor, and Business Day.
