POWER, FUEL COST RISES PUSH UP INFLATION
Rand knock reflects concerns that cost-of-living increases will hurt SA’S economy and hold back growth
THE above-inflation tariff increases granted to embattled Eskom and the surge in fuel prices this week will add to inflationary pressure, economists warned on Friday.
The National Energy Regulator (Nersa) this week rejected Eskom’s request for a 17percent increase in tariffs this year, dealing a further blow to the struggling firm’s finances. Rather than the doubledigit increases requested, power tariffs will only rise by 9.4percent this year, 8.1percent in 2020 and 5.2percent in 2021.
Annabel Bishop, the chief economist at Investec, said higher inflation was 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 3.8percent in the consumer price index (CPI) for electricity prices,” Bishop said. “Thursday’s 9.4percent increase in Eskom electricity tariffs for 2019 approved by Nersa is above the inflation rate and will place upward pressure on consumer price inflation (CPI) from July.”
The SA Reserve Bank, at its January monetary policy committee meeting, said the overall risks to the inflation outlook were assessed as 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 the tariffs hike would add to risk in CPI forecasts for the first year, but there would be a minimal impact on policy.
“Our own CPI forecast already had an appropriate assumption in it of 13percent. 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,” he said.
This week, motorists were forced to fork out 74c a litre more for petrol and 91c a litre more for diesel due to rising oil prices, which offset a stronger rand last month.
Capital Economics senior emerging markets economist
John Ashbourne said the tariff increases would have little effect on inflationary pressure.
“We estimate these price hikes will add an average of 0.3percent to headline inflation in 2019-2020, just 0.1percent more than they did in 2018,” said Ashbourne.
The rand lost ground after the Nersa decision was made public, with talk of nationalising the Reserve Bank also weighing on the currency.
Kamilla Kaplan, an economist at Investec, said the rand was the third-worst performer of 24 emerging market currencies, depreciating by 2percent against the dollar this week.
“Rand sentiment might also have 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 the intention to nationalise the Reserve Bank, which might have raised concerns among investors about the bank’s operational independence.”