Fuel cut of 47 cents despite global economic turmoil

The price of crude oil on Thursday hovered around the $67 per barrel level, offering motorists welcome respite from oil's record highs of $147 in June this year.

Recovery data on Wednesday indicated an over-recovery of 71.42 cents; however, the moving average indicated an over-recovery of about 31.18 cents.

Expensive inports

Despite the low oil price, the substantial weakening of the Rand has made it more expensive for South Africa to import the sought-after commodity.

The unstable Rand is as a consequence of investor flight from emerging markets, Director and Senior Economist at Econometrix, Tony Twine explained to BuaNews.

“The consensus is that there have been major capital withdrawals by foreign investors in equities, bonds and cash deposits.

“There is double reason for this, which is to ensure liquidity in the home markets of those foreign investors, and secondly because investors don't want to be the last one to withdraw their funds from South Africa,” said Mr Twine.

Risk aversion is dominating emerging markets as investor capital flight is causing the local currency to plummet to record lows against the Dollar.

Interest rate unlikely to increase

In a climate of global recession the South Africa Reserve Bank Governor Tito Mboweni is unlikely to raise interest rates when the Monetary Policy Committee (MPC) meets again in December 2008, said Twine.

“There are banking economists who predict South Africans could see rate cuts in the second quarter of 2009, and then there's economists who believe a rate cut is only likely to take place in quarter one of 2010,” he said.

Twine told BuaNews the current account deficit shifts between 6.5% and 9% of Gross Domestic Produce (GDP).

Reliant on foreign investment

He explained that the disparity between what South Africa exported and what South Africa was importing, including the import of services, meant the country had to rely on the inflow of foreign capital to finance the deficit.

Should investors pull out of South Africa entirely, for example, government would need to finance the deficit using the Reserve Banks forex and commercial banks forex.

“The current account deficit is likely to become more dominated by investment items such as Eskom generators and Transnet buses for 2010.

“The high current account deficit discourages longer term investment in equities,” he said.

Until there is a restoration of confidence in banks and financial institutions globally, liquidity and a fear of lending funds to other financial institution will render the market dead in the water.

“The Rand is, however, acting like a barometer in terms of foreign investment ... so its going to be a wild ride because confidence in emerging markets is at an all time low at the moment,” said Twine.

Article published courtesy of BuaNews