The recent collapse of the oil price comes as a welcome boon to the South African economy at a time when it is most needed. However, continued power supply shortages, electricity tariff increases and likely personal income tax increases will place a dampener on growth prospects for the year ahead, a panel of leading economists told the Economic Outlook Conference at GIBS.
Dr Thabi Leoka, economist at Renaissance Capital, said most South Africans would see a direct benefit of lower oil prices, whether they are among the minority of South Africans who drive private vehicles, or among those who would enjoy lower food prices due to the close correlation between the two.
Markets principal at Barclays Africa, Peter Worthington, called the decline in the global oil price “a boost to the embattled consumer” and said he was “relatively optimistic” about the prospects of high-end consumers.
He added the economic implications of the fall would result in a transfer of wealth: “The scale of the oil price decline is huge. Forecasts have changed dramatically as a result and could mean a boost of 1% to overall household spending if not redirected into debt servicing or savings.”
The declining oil price was a windfall that would buy the economy time, chief economist at First National Bank Sizwe Nxedlana said, and would help to compress the current account deficit.
However, all agreed any benefit to 2015’s economic outlook was clouded by the prospect of electricity shortages.
“Electricity shortages are a major issue for the economy and a major growth constraint. The level of unplanned outages continues to rise and there is the risk of further delays to infrastructure upgrade projects,” Worthington said.
While there was consensus that a complete shut down of the national grid was unlikely, any alternative sources of energy, such as hydroelectric or nuclear power, were too far in the future to have any impact on the current crisis.
“Eskom is a problem, and South Africa’s domestic issues of labour, unemployment and electricity shortages are in a gory mess,” Leoka said. “The economy is in a perennial malaise and is struggling to take off. It will take more than monetary policy to stimulate growth,” she added.
Worthington said while the plummeting oil price would result in a “screaming decline in headline CPI,” interest rates are likely to remain stable for the year: “There is no inflationary pressure to cut rates and it wouldn’t do anything for South Africa’s growth issues,” he said.
The panel forecast a GDP of between 2,1% and 2,5% for 2015. Worthington added that the current pace of fiscal consolidation is too slow to help solve the country’s high debt to GDP ratio, and as such, forecast a personal income tax increase in February’s budget and a higher fuel levy.
Private investment continued to be constrained by weak investor confidence, largely as a result of labour unrest, electricity supply and a lack of faith in the country’s political leadership. However, the panelists agreed that South Africa’s sovereign credit rating was likely to remain stable for the foreseeable future. “The oil price collapse will act as a stay of execution for our sovereign rating,” Nxedlana said.
Prospects for the global economy would remain mixed, with the United States receiving a boost from improved consumer and household spending as a result of the oil price decline. Growth in the Eurozone would remain constrained due to deflationary pressure, with deflation of the Euro almost certain.
This presented a particularly dangerous scenario to the local economy, with Europe still one of South Africa’s major trading partners.
“More must be done to leverage connections with the rest of the African continent,” Worthington pointed out, “with promising growth prospects among South Africa’s neighbours offering unequaled opportunities.”
Leoka reiterated this sentiment: “Our manufacturing sector is still too heavily linked to Europe, which hasn’t recovered. South Africa woke up late to the African development story.”
African oil exporting countries, such as Angola and Nigeria are likely to see a decline in growth, even going so far as to sink into likely recession in the case of Angola, Worthington said. The economies of countries that import oil and export commodities like Zambia, Tanzania, Uganda, Kenya were however expected benefit.