Will Lack of Foreign Investment into South Africa Fuel Petrol Prices Further?
Will Lack of Foreign Investment into South Africa Fuel Petrol Prices Further?The price of fuel and diesel in South Africa has risen in the past 3 months, even though theinternational traded price of crude oil has dropped. What is the major reason for this? Theweakening of the rand is the most popular answer. But what is contributing to the weakeningof the rand? Is it the European Debt Crisis, a stronger dollar, weak investment flows intoSouth Africa, or a combination of a number of factors?“The weakening rand can be attributed to a lack of investment flows into South Africa andthe weak performance of exports”, explains Frost & Sullivan’s Economic Analyst, CraigParker. “If South Africa’s trade balance is negative, it means the country is importing morethan it is exporting. This results in an increase in demand for foreign currency to pay for theexcess imports relative to demand for the rand for exports, leading to a depreciatingcurrency. This is usually rectified once imports become too expensive and exports becomemore competitive, and exports improve relative to imports, resulting in an appreciation of therand.”A country can sustain a negative trade balance without affecting the currency if there issufficient demand for local currency in the form of financial investment into the country,plugging the current account deficit. This is, however, dangerous in the long run.In 2012, South Africa attracted an immense amount of portfolio investments, especially bondbuys. This resulted in substantial investment inflows bolstering the current account andlimiting the depreciation of the currency. Holdings of local debt reached their highest levels in2012. “The only problem with these flows is that they are not sustainable,” comments Parker.“Bond yields fall as more are purchased and investors become less interested, leading to areversal of inflows. The reversal of these inflows may also be drastic if domestic issues,such as labour unrest, lead to a credit downgrade.”But should foreign direct investment (FDI) not sustain the currency? The short answer, saysParker, is that the country is not attracting enough FDI and this is not positively influencingthe exchange rate. Another concern is that the mechanism resulting in the rebound of thecurrency is effectively cancelled by the poor demand for exports as a result of the recessionin Europe and diminished demand from Asia.
South Africa may import less as a result of the higher prices for imports; however there islittle demand for exports to reverse the deficit. The weak currency will most likely remain at aweaker level until a number of factors improve. Firstly, there is a need to attract greaterinvestment; secondly, international demand for South African exports must pick up; andthirdly, there is room for improvement on local productivity and competitiveness to improveexport competitiveness, even when the rand is stronger. Achieving the third will improve thehigh level of volatility of the rand, and increase the sustainability of a stronger rand, withoutthe reliance on volatile financial inflows. Political stability and limited labour unrest isparamount to keeping the rand stable and any instability on this front will deter investmentfurther, weakening the rand.The demand for South Africa’s exports is expected to improve in the latter half of this year.The rand, however, will remain weak until then and Frost & Sullivan does not expect anymajor decrease in the price of fuel in the next six months.Contact:Samantha JamesCorporate CommunicationsFrost & Sullivan AfricaTel: +27 21 680 3574Email: Samantha.James@frost.com