Oil price dive is a Coronavirus silver lining for SA economy

Oil prices are suddenly down and are expected to remain subdued, a rare piece of good news for South Africa’s dazed and confused policymakers and consumers.

Global oil prices have been tanking because global economic growth is seen to be taking a beating in the face of the Coronavirus (Covid-19) outbreak, which has infected over 90,000 people worldwide, the vast majority in China. Oil prices put in a small rebound at one point on 4 March 2020, as the Organisation of Petroleum Exporting Countries (OPEC) eyed output cuts. But Brent crude prices remain near 15-month lows just north of $50.00 a barrel and have lost over 25% since 2020 highs that were scaled in January.

For Pretoria, this is, of course, a double-edged sword, as oil prices are slumping because of plummeting demand from China, which is also losing its appetite for South African commodities ranging from West Coast lobster to iron ore. 

A slew of major banks have cut their oil price forecasts because of the unfolding situation in China, as Covid-19 takes an unprecedented toll on a titanic economy that has seemingly been on steroids for decades. 

“We now expect China’s oil demand growth in 2020 to be close to zero,” Morgan Stanley said earlier this week in a note. 

The fall in oil prices does offer relief for the struggling South African economy on a couple of fronts. For starters, it means lower prices at the pump for consumers. This week, domestic retail prices fell between 19 and 54 cents a litre for diesel and petrol. That, in turn, helps to keep the lid on inflation. This has generally been muted in large part because of the weak state of the economy and high unemployment, but prices have perked up lately, with renewed rand weakness a contributing factor. 

Annual consumer inflation was 4.5% in January 2020, up from 4.0% in December 2019. Producer price inflation accelerated in January to 4.6% from 3.4% the previous month. Falling oil prices will dampen this trend.

A rebound in the rand’s value against major currencies, notably the dollar, will also help keep both domestic petrol prices and inflation in check. The rand has made some gains since Tuesday’s shock GDP figure, with indirect support provided by the economic fallout from Covid-19, which prompted the US Federal Reserve to cut interest rates by 50 basis points in an emergency move. That widens the rate spread between Pretoria and Washington, enhancing the rand’s yield appeal.  

The South African Reserve Bank’s (SARB’s) Monetary Policy Committee (MPC) meets in two weeks’ time, and subdued oil prices and aggressive rate cuts elsewhere – not to mention a barely growing domestic economy – will give it plenty of scope to seriously consider monetary easing itself. That would follow a surprise 25 basis point cut in the SARB’s key repo rate that the MPC made in January 2020, taking it to 6.25%.

Lower inflation, petrol prices and interest rates are all welcome, and could even provide a spark of growth to the South African economy. The problem, of course, is that one of the driving forces at play here is Covid-19 and many of its consequences for South Africa’s economy remain unknown. But if Chinese demand for commodities such as oil is flatlining, things are bound to get rough. BM