Lower oil prices no gain for oil-importing SA

JOHANNESBURG – The recent fall in international oil prices has cheered oil-importing South Africa, but may not prove to be the answer to the country’s current account woes, analysts say.

Africa’s biggest economy imports most of its oil needs and the jump in prices over the past few years has heaped pressure on its trade account, swelling the current account shortfall to more than five per cent of gross domestic product in 2006. A massive jump in imports following refinery shutdowns lifted the October trade deficit to a record 12,9 billion rand, and it remained at 10,5 billion rand in November despite a cooling in crude prices.The effect of declining oil prices on inflation was also limited, analysts said.”The country’s ability to benefit from reduced oil prices is not as straightforward as most would believe,” said Razia Khan, regional head of economics at London-based Standard Chartered.”A decline in the international oil price does not always lead to an improvement in the trade balance,” she added.In November lower oil prices did not translate into a healthier trade balance, and that might continue in January if South Africa uses it as another opportunity to replenish crude reserves.After reaching a high of US$78 a barrel in early August last year, the Brent crude price eased steadily to US$70 on Sept 1, then went below US$60 on the Oct 16, to hover in the mid-US$50 range currently.South Africa’s current account deficit has remained a bugbear for the economy, knocking the rand currency in 2006, and is likely to expand in the fourth quarter of 2006 from the previous 5,2 per cent.The shortfall is expected to loom large for years to come.Huge construction projects of stadiums for the 2010 Soccer World Cup and a multi-billion dollar rapid rail link in the country’s business hub Gauteng will require imports of machinery and services, adding pressure to the trade account.”The import demand for construction infrastructure is going to outweigh any benefit we might have from oil, therefore the story for the balance of payments is a very bleak,” Lumkile Mondi, economist at the Industrial Development Corporation, told Reuters.The lower oil prices could also add to pressure on the currency and may hurt equities due to the commodity’s impact on precious metal prices – bad news for South Africa, the world’s biggest producer of gold and platinum.Khan said weaker metals prices would take the shine off the country’s shares, an increasingly important source of portfolio inflows, which until now have financed the current account shortfall to the central bank governor Tito Mboweni’s delight.A change in investor sentiment and loss of the crucial inflows would hit the volatile rand, eroding some of the benefits of cheaper oil prices, such as lower domestic fuel prices, Standard’s Khan said.The decline in crude prices and gains in the rand since it dropped to a 3-1/4 year low in October last year have helped to tame inflationary pressures through lower domestic pump prices but with only a 4,28 per cent direct impact its effect on the targeted CPIX inflation index is small.”While the oil price (decline) might be good news for our inflation, especially for transport costs, it might not be a big deal for the balance of payments at all,” Mondi said.Nampa-ReutersA massive jump in imports following refinery shutdowns lifted the October trade deficit to a record 12,9 billion rand, and it remained at 10,5 billion rand in November despite a cooling in crude prices.The effect of declining oil prices on inflation was also limited, analysts said.”The country’s ability to benefit from reduced oil prices is not as straightforward as most would believe,” said Razia Khan, regional head of economics at London-based Standard Chartered.”A decline in the international oil price does not always lead to an improvement in the trade balance,” she added.In November lower oil prices did not translate into a healthier trade balance, and that might continue in January if South Africa uses it as another opportunity to replenish crude reserves.After reaching a high of US$78 a barrel in early August last year, the Brent crude price eased steadily to US$70 on Sept 1, then went below US$60 on the Oct 16, to hover in the mid-US$50 range currently.South Africa’s current account deficit has remained a bugbear for the economy, knocking the rand currency in 2006, and is likely to expand in the fourth quarter of 2006 from the previous 5,2 per cent.The shortfall is expected to loom large for years to come.Huge construction projects of stadiums for the 2010 Soccer World Cup and a multi-billion dollar rapid rail link in the country’s business hub Gauteng will require imports of machinery and services, adding pressure to the trade account.”The import demand for construction infrastructure is going to outweigh any benefit we might have from oil, therefore the story for the balance of payments is a very bleak,” Lumkile Mondi, economist at the Industrial Development Corporation, told Reuters.The lower oil prices could also add to pressure on the currency and may hurt equities due to the commodity’s impact on precious metal prices – bad news for South Africa, the world’s biggest producer of gold and platinum.Khan said weaker metals prices would take the shine off the country’s shares, an increasingly important source of portfolio inflows, which until now have financed the current account shortfall to the central bank governor Tito Mboweni’s delight.A change in investor sentiment and loss of the crucial inflows would hit the volatile rand, eroding some of the benefits of cheaper oil prices, such as lower domestic fuel prices, Standard’s Khan said.The decline in crude prices and gains in the rand since it dropped to a 3-1/4 year low in October last year have helped to tame inflationary pressures through lower domestic pump prices but with only a 4,28 per cent direct impact its effect on the targeted CPIX inflation index is small.”While the oil price (decline) might be good news for our inflation, especially for transport costs, it might not be a big deal for the balance of payments at all,” Mondi said.Nampa-Reuters