For The People

The double whammy of a strengthening US Dollar and a rising crude oil price

South African consumers are becoming used to the cruel body blows inflicted by steadily rising fuel prices together with the inflationary effect they bring to food and transport prices. First there was the 79c a litre increase following the raising of the fuel levy and contributions to the Road Accident Fund announced by our short-lived finance minister, Malusi Gigaba during his 2018 budget speech.

Then there was the 2nd May 2018 fuel price increase occasioned by a weakening Rand (against the US Dollar) and rising crude oil prices which took South African retail petrol and diesel prices to an all-time high. As if that wasn’t enough, just this week we saw fuel prices rise again as the Rand continued to weaken and oil prices remained buoyant.

Now, with ongoing uncertainty regarding whether or not the Iran nuclear deal will hold, the increasing likelihood of a global trade war, and uncertainty regarding the outcome of the upcoming summit between US President Trump and North Korea’s leader Kim Jong-Un, arguably two of the worlds more unpredictable leaders, chances are that oil prices will remain high for some time.

Equally if not more worryingly US dollar strength since early May has been fueled by the Federal Reserve ending its expansive monetary policy limiting dollar supply increasing its value. Added to that increasing demand for dollars amongst buyers of US treasury notes and bonds is reinforcing dollar strength and is expected to do so for some time.
Under the circumstances non-oil producing emerging market economies are feeling the pain as they are forced to suffer the double whammy of high oil prices and a rising dollar. Not only is the price of oil going up in dollar terms, but it is costing more Rand to buy that very same oil. Further fuel price rises are therefore inevitable especially because the Rand has fallen dramatically since last week’s increase in retail fuel prices was announced.

With the Rand having breached the R13:$1 barrier this past week (the Rand is amongst the worst performing emerging market currencies in April and May), the resilience of emerging markets such as ours and Turkey’s is being tested. What is inevitable, unless oil prices soften and/or there is a reversal in dollar strength, is that local fuel prices will rise again very soon. The inflationary impact of three successive, large, fuel price increases in little more than a month will unleash rampant rises in fuel, transport and food prices.

In a low-growth economy that is still not showing any meaningful signs of recovery, South Africans are going to feel the pain of our exposure to external factors that are largely beyond our control. Sadly, this will be of no comfort to the poorest amongst us who are struggling most to make ends meet.

Comments are closed, but trackbacks and pingbacks are open.