Moody’s Investors Service is the only credit agency that has keep South Africa at investment grade. File Photo: IOL

JOHANNESBURG – The headlines announcing that South Africa entered into a recession will squeeze consumer pockets due to its effect on the rand exchange. 

The rand weakened to a worst level of R15.69 per dollar on September 5 after trading at R14.88 before the release of the gross domestic product (GDP) data on September 4. 

This 5.4 percent jump makes all imports that much more expensive if the importer has not covered their foreign exchange commitments by taking out forward cover, which is a kind of insurance against adverse exchange rate movements. 

Most large importers such as the supermarket chains cover forward at least six months, so the more expensive imported items will only be visible to the ordinary consumer with a lag of several months.

The Central Energy Fund, which determines the regulated fuel prices, does not take any forward cover considerations into account, so there the impact on imported petroleum products is immediate. 

For the period July 27 to August 30, which is the average period used to calculate the September fuel prices, the petrol price should have increased by 27.845c per litre of which the vast majority or 26.347c per litre was due to the deterioration in the rand from an average of R13.4713 in the previous period to R13.9430 in the current period.

The rand has, however, moved sharply weaker in recent days so on August 30, when the rand was trading at R14.6130, the daily under-recovery was 90.488c per litre, while on September 5, when the rand was at R15.5773, the under-recovery ballooned to 135.346c per litre. 

That means that if the government does not cap the fuel prices as it did in September, then the October petrol price could jump by a similar amount to push the price above R17 per litre.

That is the most immediate impact on the person in the street, but there are other impacts as well. 

Investment grade

The most serious is if Moody’s Investors Service, the only credit agency to keep South Africa at investment grade, decides that the recession means that the government cannot meet its revenue targets and so it needs to downgrade South Africa to sub-investment or junk status. 

If that were to happen, then foreign asset managers would be forced to sell their South African government bonds as their mandates say they may only hold investment grade bonds in some of their portfolios and this could prompt foreign bond selling of around R150 billion.

Such a large withdrawal of foreign capital could see the rand move above R17 per US dollar with a consequent impact on imported goods.     

The other impact is more indirect as executives delay expansion plans or stop hiring people as they wait for the economy to return to growth. The 25 percent depreciation of the rand to a current rate of R15.15 per USD from an average monthly rate for April of R12.0841 per dollar, on the other hand, will boost the competitiveness of South African exports even further, and this should help economic prospects in the second half of the year.

For those who can remember back a few years, the good news is that Statistics South Africa estimated a recession in the last quarter of 2016 and the first quarter of 2017, but subsequent revisions meant that the recession did not take place, so the optimists among us expect something similar in 2018. 

Follow Business Report on Instagram here