Is it Time for South Africa to Respond to the Oil Price Fall?

By Marcello Conti

Millano- Sunburst Africa–The crisis in the oil price in 2014 is negatively affecting all markets of the world but the reactions of the governments are quite different. The United States, who have more resources to be allocated to consumption (retail sales in November rose by 0.7%), are celebrating, but the rest of the world is in worry. In the past days, two central banks of two countries amongst the world’s largest oil producers: Russia and Norway, have had to step in to avert the worst, but the reaction was not exactly the same. Moscow has raised rates by 7 point bringing them to 17.5% in an attempt to stimulate prices of goods and the rouble freefall; The Norwegian Central Bank has acted with an opposite movement.

To avert a slowdown in economy, the Government cut the cost of borrowing by a quarter point, bringing the benchmark rate from 1.5% (the level it was in by March 2012) to 1.25%, a record low since 2009. Thanks to the oil collected in the North Sea, Norway is the largest producer of oil in Europe, but the decline in prices is negatively affecting the country’s economy.

The National Statistics Institute has cut growth forecasts for 2015 from 2.1 to 1% mainly due to the reduction of investment and also the central bank has adjusted the Gdp forecast for 2015 bringing it to 1.5% from 2.25% as a result of an expected drop in investment in the oil sector by 15%.

The effects of the fall of energy prices has an impact on the world economy and affect not only the consumer countries but the producers countries as well. Nearly all emerging economies are suffering.

Brazil, Russia, China or Mexico and Nigeria but also those countries that should be advantaged as direct importers like Turkey or South Africa. The reason is the spread between currencies and bond markets.

Multinationals from emerging countries got indebted in the years of economic boom with emissions of bonds whose repayment is threatened by a too strong dollar. The debts were contracted when the dollar had not the current strength (by June 2014 it rose by 12%). According to Merrill Lynch, since 2008, these countries have increased their foreign currency debt by 66% to over 5 thousand billion dollars: the rise of the dollar, therefore, makes these debts harder to honor. Since May 2013 the Russian ruble has lost 42%, the Brazilian real 21%, and the South African rand 15%.

This will lead the brics economies to an uncertain future that will influence the future growth.

 How Will South Africa React to Oil Price Fall?

For the moment the country seems to absorb these financial earthquakes without any struggles and there aren’t any significant moves on agenda by the South African Reserve Bank but the scenario could be better. Annual CPI inflatian dropped by 0.1% to 5.8% in November from 5.9 in October. Petrol and food prices, which are the key drivers of changes in the cpi both showed lower annual inflation rates, especially the oil prices. Annual petrol inflation now stands at 1,2% and the petrol price dropped by 45 c/l last month, it was the third successive monthly drop and the cheapest since November 2013. However, growth is projected to slow to 1.4 percent in 2014 and rebound only modestly to 2.1 percent in 2015 on imporved industrial relations, while private consumption remains depressed under tighter financial conditions.

As the Monetary Policy Committee (MPC) of the SA reserve bank meet in January 2015, all eyes will watching to see what decision will be arrived at on interest rates given the oil price fall and the current global response to it.

 

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