Rand's 'downward spiral' could lead to record fuel prices in 2020, warns AA

05 February 2020 - 13:54 By Motoring Reporter
Fuel prices are set to rise in 2020 due the weak rand, says the AA.
Fuel prices are set to rise in 2020 due the weak rand, says the AA.

With the international oil market stable, rand weakness is likely to be the dominant factor in fuel pricing for the year. This is the opinion of the Automobile Association (AA), which released its annual fuel price outlook on Wednesday.

"Factors affecting the fuel price have rarely been more finely balanced than they currently are," said the AA.

The association noted that much of the world's oil is produced in some of the most politically fluid territories, and South Africa's influence on the international oil price is negligible.

"We consume under one percent of the world's daily oil demand. Even a total boycott of petroleum fuels in South Africa would be unlikely to affect world prices, so the country has little scope for influence," it said.

"However, the recent tensions between Iran and the USA rattled the markets into a price spike of several dollars a barrel, showing where the influence truly lies."

The association said the unpredictability of the current US administration exposed South African fuel users to collateral damage from oil price movements - as seen during the Iran affair in early January.

The AA said the key problem in SA continues to be economic policy, with tax revenue undershoots, infrastructure underspend, de-industrialisation and ongoing power blackouts counteracting efforts by President Cyril Ramaphosa to boost investment.

"Capital follows returns and if South Africa is, as seems likely before long, downgraded to junk status, the rand is likely to weaken further, offsetting returns investors might make. This increases the possibility of a downward spiral in which rand weakness accelerates while risk-averse capital investment seeks other harbours,” noted the AA

Doubting whether a downgrade could be warded off, it noted that a strong shift in the government's stance and clear articulation of investment-friendly policy would be key to limiting the time the country spends outside the investment-grade brackets. 

The combination of factors negatively effecting the rand is likely to offset the general stability the association expected to see in the oil price, it added.

"Our overall view is that South Africans should expect increases in the fuel price in 2020, driven primarily by rand weakness. We do not foresee declines in the oil price sufficient to offset our expectations for rand depreciation, and we cannot rule out the possibility that SA fuel prices may test their previous record highs this year."