Tariff increase granted to Eskom adds to inflationary pressures
JOHANNESBURG - The above-inflation tariff increases granted to embattled Eskom and the surge in fuel prices announced this week will add to the inflationary pressures, warned economists on Friday.
National Energy Regulator (Nersa) this week rejected Eskom’s request for a 17 percent hike in power tariffs this year, dealing a further blow to the struggling firm’s finances. Rather than the double-digit increases requested, power tariffs will only rise by 9.4 percent in 2019, 8.1 percent in 2020 and 5.2 percent in 2021.
Annabel Bishop, the chief economist at Investec said higher inflation is likely this year from the second quarter, with Nersa's decision lifting the trajectory along with higher rand oil prices.
“Electricity tariff increases have a meaningful impact on inflation, with a weighting of 3.8 percent in the consumer price index (CPI) for electricity prices,” Bishop said.
“Thursday’s 9.4 percent increase in Eskom electricity tariffs for 2019 approved by Nersa is above the inflation rate and will place upward pressure on CPI inflation in SA from July.”
The South African Reserve Bank (Sarb) at its January Monetary Policy Committee meeting said the overall risks to the inflation outlook were assessed to be moderately on the upside.
The central bank flagged administered prices such as electricity and water tariffs, rising domestic food prices in the outer years, changing investor sentiment towards emerging markets, moderation in global growth and volatile international oil prices as posing the biggest risks.
Peter Attard Montalto, the head of capital markets research at Intellidex, said that the tariffs hike would add upside risks in the first year to CPI forecasts, including that of the Sarb, but that there would be a minimal real impact on policy.
“Our own CPI forecast already had an appropriate assumption in it of 13 percent . This tariff increase will be challenging to the mining and agriculture sectors especially but overall we do not see it as an especially dramatic shock to GDP beyond the way we already think about long-run administered prices growth into inflation,” Mantalto said.
Motorists were this week forced to fork out 74 cents a litre more for petrol and 91c a litre more for diesel due to rising oil prices which offset a stronger local currency last month.
Capital Economics senior emerging markets economist John Ashbourne said the tariff increases would have a very small effect on inflationary pressures.
“We estimate that these price hikes will add an average of 0.3 percent to headline inflation in 2019 and 2020, just 0.1 percent more than they did in 2018,” Ashbourne said.
The rand lost further ground after the Nersa decision was made public, with talk of nationalising the Sarb also weighing on the local currency.
Kamilla Kaplan, an conomist at Investec, said the rand was the third-worst performer out of 24 emerging market currencies, depreciating by 2 percent against the dollar this week.
“Rand sentiment may have also been dampened by the above-inflationary increase in electricity tariffs given the possible implications for economic growth and inflation,” Kaplan said.
“Moreover, the President confirmed intentions for the Sarb to be nationalised which may have raised some concern amongst investors over the bank’s operational independence going forward.”