Research experts, Simonis Storm have predicted that petrol and diesel prices could move closer to N$23 per litre by mid-2023 as its conservative or base scenario forecast while in the extreme scenario, the firm sees local fuel prices at N$25 per litre.
In their latest announcement, the Ministry of Mines and Energy (MME) incurred under-recoveries both on petrol (N$1.87 per litre) and diesel (N$0.30 per litre). As usual, the National Energy Fund (NEF) was used to partially subsidise under-recoveries and so petrol prices only increase by N$1.50 – instead of N$1.87 – to N$19.78 per litre and diesel prices remain unchanged at N$20.65 per litre for the month of March 2023.
“In addition, due to rising demand and uncertainties around supply, higher global Brent crude prices are being forecasted towards the end of the year. These forecasts imply that Namibia could potentially see further fuel price hikes in coming months. In order for Namibia to cut local fuel prices, we would need a USD/ZAR closer to 17. This is unlikely,” the research firm said last week.
The firm also highlighted that to put the benefit of NEF in perspective, “our petrol prices would have been at N$21.58 – and not N$19.78 – in March 2023 if the government did not use the profits from over-recoveries to subsidise under-recoveries”.
“This is not standard practice in South Africa, where the full under- or overrecoveries are allocated to consumer prices and hence one of the reasons why Namibian fuel prices are often cheaper than South Africa’s (the other reason is higher levies in South Africa),” extended the firm.
REDUCTION OF LEVIES
There are a number of opposing forces at play, which makes the future path of local fuel prices uncertain, Simonis Storm said.
“MME with the approval of Ministry of Finance (MoF) can reduce certain levies charged on our fuel prices and so provide fuel price relief to consumers. We note that the NamCor levy which was reduced from N$0.08 per litre to N$0.04 per litre in April 2022 is still in place, but some industry players say this levy can be eliminated indefinitely.
“Also, some industry experts call for a permanent reduction in the Motor Vehicle Accident (MVA) Fund Levy (currently N$0.50 per litre) due to an easing of accidents and improved financial conditions at the MVA Fund. Indeed, the MVA Fund has recorded revenues far above their total claims in recent financial years, leading to a positive cash flow position. The value of their assets are almost double the value of their liabilities and direct claims have declined by 10.2% on an annualised basis since 2017. Hence, the permanent reduction in the MVA Fund levy on our fuel prices are being called for,” noted the firm.
NEF INTERVENTION
Simonis Storm also noted that the NEF could also prevent local fuel prices from reaching N$25 per litre by subsidising portions of future under-recoveries. However, the NEF paid out a substantial amount of close to N$1 billion in 1H2022 alone for major under-recoveries incurred.
“Since the balance of the NEF is not known, we are not sure how many more – or to which extent – under-recoveries consumers can be shielded from in future. One risk to our base scenario forecast is OPEC+ deciding to cut production further, artificially constraining global supply. It is also uncertain whether petrol, diesel, jet fuel or other fuel products will see production cuts if OPEC+ decides to limit production.”
RAND QUESTION
The Rand has depreciated significantly, defying the firm’s initial forecasts of 16.95 against the US dollar in 1Q2023. Instead, the Rand has averaged 17.46 YTD.
“The year started off with bullish sentiment on risky assets which led to the Rand dropping below 17.00 and reaching a low of 16.75 against the US dollar on 12 January 2023, with the JSE All Share index rising to 8.5% YTD on 27 January 2023. Risk on sentiment has been reversed early February 2023 as market participants expect the Fed to continue hiking for longer than expected and so the US dollar appreciated against a basket of currencies. However, since end of last year we always maintained the view that the Fed would hike until about mid-2023. So, the Rand selloff is overdone in our view,” stated Simonis Storm.
Based on the firm’s USD/ZAR forecasts and consensus forecasts on global Brent crude prices from Bloomberg, the firm estimate that the Rand oil price will increase until the end of the year.
“We expect the Rand to average 17.80 in 1Q2023, 18.25 in 2Q2023, 18.50 in 3Q2023 and 18.10 in 4Q2023. The Rand could appreciate due to US dollar weakness when risk on sentiment returns as the Fed stops hiking interest rates by mid-2023, but this can be limited given the recent grey listing by the Financial Action Task Force (FATF).”