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Send  Share  RSS  Twitter  22 Apr 2013

PETROL: Will Lack Of Foreign Investment Into SA Fuel Petrol Prices‘

 





Recent Gauteng Business News

The price of fuel and diesel in South Africa has risen in the past 3 months, even though the international traded price of crude oil has dropped. What is the major reason for this‘ The weakening of the rand is the most popular answer. But what is contributing to the weakening of the rand‘ Is it the European Debt Crisis, a stronger dollar, weak investment flows into South Africa, or a combination of a number of factors‘

“The weakening rand can be attributed to a lack of investment flows into South Africa and the weak performance of exports”, explains Frost and Sullivan’s Economic Analyst, Craig Parker. “If South Africa’s trade balance is negative, it means the country is importing more than it is exporting. This results in an increase in demand for foreign currency to pay for the excess imports relative to demand for the rand for exports, leading to a depreciating currency. This is usually rectified once imports become too expensive and exports become more competitive, and exports improve relative to imports, resulting in an appreciation of the rand.”

A country can sustain a negative trade balance without affecting the currency if there is sufficient 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 bond buys. This resulted in substantial investment inflows bolstering the current account and limiting the depreciation of the currency. Holdings of local debt reached their highest levels in 2012. “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 a reversal 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, says Parker, is that the country is not attracting enough FDI and this is not positively influencing the exchange rate. Another concern is that the mechanism resulting in the rebound of the currency is effectively cancelled by the poor demand for exports as a result of the recession in Europe and diminished demand from Asia.

South Africa may import less as a result of the higher prices for imports; however there is little demand for exports to reverse the deficit. The weak currency will most likely remain at a weaker level until a number of factors improve. Firstly, there is a need to attract greater investment; secondly, international demand for South African exports must pick up; and thirdly, there is room for improvement on local productivity and competitiveness to improve export competitiveness, even when the rand is stronger. Achieving the third will improve the high level of volatility of the rand, and increase the sustainability of a stronger rand, without the reliance on volatile financial inflows. Political stability and limited labour unrest is paramount to keeping the rand stable and any instability on this front will deter investment further, 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 and Sullivan does not expect any major decrease in the price of fuel in the next six months.

 
 
 
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