How do we see 2015 rolling out? Oil is certain to play a leading role. Here’s a great synopsis of oil’s impact on the market that we received from the research and investment team at Acsis:
The dramatic collapse of the oil price during the final quarter of the year was probably the most important macro-event of 2014. Oil fell from $91/barrel at the start of the fourth quarter to $55 at the end of the year. It fell further in the first two weeks of 2015 to around $48/barrel. Since the slump in the oil price is more due to supply factors than demand factors, it is net positive for global growth and inflation. Supply has surged over the past five years, mainly in North America, due to technological improvements and the incentive of a decade of high real oil prices. While demand growth is weaker than expected – mainly from China – there is no global recession (unlike the 2008 oil price collapse).
The slump in the oil price helps our economy in four ways. While the rand has weakened by about 9% against the US dollar in 2014, the oil price fell by much more (it is worth noting that the rand strengthened against the euro in 2014). The rand oil price has therefore fallen 50% between mid-2014 and last week.
Current account deficit improves
The current account deficit narrowed somewhat to 6.0% of gross domestic product (GDP) in the third quarter according to the latest Reserve Bank data, from a revised 6.3% of GDP. It remains large by international standards and is a headache for the Reserve Bank, but there are definite signs of improvement. Export volumes grew faster than import volumes in the third quarter, while export prices improved relative to import prices. An average oil price of $60 in 2015 could reduce our import bill by up to R60 billion per year (around 1.5% of GDP). The current account deficit should shrink meaningfully provided other commodity prices don’t fall further, and the non-commodity trade deficit continues to improve.
Lower inflation takes pressure off the Monetary Policy Committee
Oil prices of $50 to $60 in 2015 could see inflation bottom below 4% and average around 4% in 2015 – well within the South African Reserve Bank’s (SARB’s) target. It also automatically means higher, more ‘normal’ real rates even without hikes. A smaller current account deficit, and potentially more gradual US rate hikes than previously thought, will remove some of the external risks, with a large part of the currency adjustment surely behind us. While we are still in a gradual hiking cycle, it is possible that the next rate hike could only be in 2016.
Relief for consumers and opportunity for businesses to capture some margin
Relief for consumers will be quite immediate as the petrol price falls. It amounts to more than R1billion per month in savings for South African households. Retail sales data for November released last week already shows a modestly improving trend in spending. If the annual growth in nominal incomes of around 7.5% in 2014 persists and inflation falls towards 4%, real income growth of 3% should result in spending growth of a similar magnitude. The outlook has therefore improved substantially since last year.
The business environment remains very competitive and some of the cost savings should be passed on. This means that the prices of other goods will probably rise slower (or could even fall in some cases), providing further relief.
More options for Minister Nene to close the Budget deficit in 2015
South Africa avoided a credit ratings downgrade in December, with Fitch citing the commitment to fiscal consolidation demonstrated in the October mini-Budget. The most recent budget numbers, for the fiscal year to end November, show that revenues are growing ahead of budget and expenditure is growing slightly slower than planned. This is encouraging, suggesting South Africa’s ‘twin deficits’ are on track to being smaller in 2015. The lower petrol price affords the Finance Minister the opportunity to fund some of the R12billion in planned tax increases for the coming fiscal year from a fuel levy increase, rather than through higher VAT or individual tax rates. A 50c/litre hike in the petrol price could raise R10billion of the R12billion needed. This is doable with another petrol price cut expected in February.
All in all, the local economy could deliver a positive surprise in 2015, which again was unthinkable two months ago (stronger than expected growth will also help Minister Nene fill the state’s coffers easier). For this to happen, we’ll need fewer strike interruptions and for electricity supply disruptions to be limited. The former is not entirely unlikely, as most major sectors are now locked into three-year wage agreements. However; the latter is the dark horse for 2015, as persistent electricity outages will likely limit economic improvement.
January 2015 Ticked, and Still Looking Good
It’s been a long time since the South African consumer had a good story at the beginning of the year. At Veritas, we see the consumer starting off 2015 with a lot of positives, but as mentioned above, various factors at home could dampen the status quo.
It’s most beneficial to be very aware of the potential savings that can be achieved, and then, make sure you actually experience them. This scenario creates the perfect opportunity to put some money aside and not let it get absorbed by day-to-day spending. For example, you can do this by quantifying your savings on petrol and re-routing them to your outstanding bond, or you can redirect them straight to your own savings, pay off that credit card bill, or use them to ensure you are contributing the maximum to your company pension, provident fund or RA. One way to make 2015 work harder for you.