Johannesburg – Eskom is to blame for SA not reaping a big net trade improvement from the sharp drop in oil prices, according to merging markets economist Peter Attard Montalto of Nomura.

“There has been a lot of market expectation that the sharp drop in oil prices would result in a big net trade improvement for South Africa,” he said on Tuesday.

“Although it is still early days, the initial impact, and in particular on the fourth quarter numbers, seems pretty much the opposite of what the market was expecting and more in line with our view that the net terms-of-trade effect is neutral.”

Nomura thinks the reason for this is Eskom.

Montalto’s analysis shows there was a huge spike in oil imports in October and still a high run rate in November as prices dropped.

“However, if we make some (very) rough estimates of Eskom’s import run rate from its press releases and annual report commentary, then we can attribute most of the spike to Eskom importing emergency diesel for running peaking plans owing to tight system capacity,” said Montalto.

“What is important for gross domestic product (GDP) is total imports including Eskom and here we can see the key drag that Eskom will cause for GDP in the fourth quarter. We estimate this will reduce our GDP growth forecast by around 0.3-0.4 percentage points for the fourth quarter, though this is offset by slightly better export performance than we had initially pencilled in.”

There is a similar effect in the fourth quarter current account deficit.

“Eskom has pledged to rapidly convert diesel peaking plans to OCGTs (open cycle gas turbines), but this may well take six months to a year in our view and hence continued diesel imports will remain,” he said.

“Additionally, we should remember that gas, while significantly cheaper than diesel – in both material cost and transportation cost – has not seen its price drop with oil.”

Price considerations for crude products are also important. The import cost has not tracked wholesale prices much since 2011 with a volatile but broadly flat trend in wholesale prices being countered by steadily rising import prices (rand/kg).

“We do not believe there are serious compositional issues on the types of crude oil imported, but a steadily weaker rand and increasing transportation costs (given the routes crude takes to get to South Africa) have all played a part,” said Montalto.

“Hence, while wholesale prices have dropped back to below 2010 levels, import prices are only back to levels of the middle of last year.”

Because Nomura expects the rand to weaken further in the short run and oil prices to fall further, the real benefit for SA should be muted in its view.

“In the months ahead we will be watching closely to see if we can further separate out this underlying and headline crude volume effects owing to Eskom,” he said.

“Hence, we continue to maintain our GDP growth and current account forecasts despite lower oil prices, though the risks are for a slight upside boost in consumption on lower petrol prices.”