South Africa\u2019s Eskom is seeking a jumbo electricity price hike, spelling good news for its creditors but pain for customers and possible fallout for the country\u2019s economic growth.<\/p>\n\n\n\n
The state-owned power utility has asked the National Energy Regulator to approve a 36% price increase for its 2026 financial year, a figure far surpassing the country\u2019s inflation rate.<\/p>\n\n\n\n
While the move would benefit bondholders by boosting Eskom\u2019s cash flow, the impact on consumers and businesses could be serious, adding to inflation pressures and hampering growth.<\/p>\n\n\n\n
Eskom says the proposed tariff increase is critical to its financial health, with the utility burdened by more than R400 billion in borrowing.<\/p>\n\n\n\n
\u201cFrom an investor\u2019s perspective, this would be a great deal because it would help deleverage the pile of debt,\u201d said Manuel Mondia, research analyst & portfolio manager at Aquila Asset Management AG.<\/p>\n\n\n\n
The yield on Eskom\u2019s unsecured 2028 bonds declined seven basis points Thursday to trade at 6.78%, its lowest level since November 2021. <\/p>\n\n\n\n
The yield has dropped 472 basis points in the year-to-date.<\/p>\n\n\n\n
Mondia said that years of mismanagement and an unsustainable cost structure have forced Eskom into a catch-up situation.<\/p>\n\n\n\n
\u201cTariffs in the past were inadequate, and now they have to rush to catch up. The key question is whether this will be approved,\u201d he said.<\/p>\n\n\n\n
Inflationary Pressures<\/strong><\/p>\n\n\n\n Eskom\u2019s proposed hike will add to already elevated electricity costs. <\/p>\n\n\n\n Since 2010 its aggregate standard tariffs have increased at almost 15% annually, compared to average inflation of about 5.2% over the period, according to research done by Codera Analytics.<\/p>\n\n\n\n Electricity prices and other fuels account for 3.7% of South Africa\u2019s inflation basket, \u201cbut an outsized increase in tariffs means it can have a significant impact on inflation,\u201d said Yvonne Mhango, Africa economist at Bloomberg Economics. <\/p>\n\n\n\n A rise in prices will weigh on the country\u2019s inflation outlook, she said. It could also have implications for borrowing costs.<\/strong><\/p>\n\n\n\n South African Reserve Bank Governor Lesetja Kganyago and his colleagues last week cut interest rates by 25 basis points to 8% after holding them at a 15-year high since May 2023 to quell price pressures.<\/p>\n\n\n\n The SARB\u2019s move followed a drop in the annual rate of inflation to 4.4% in August from a post-pandemic high of 7.8%, and Kganyago said any additional rate cuts will depend on inflation remaining in check.<\/p>\n\n\n\n The central bank chief in the past has lamented the role played by administered prices including utilities in keeping inflation high, and by extension, interest rates elevated. <\/p>\n\n\n\n In July, he said that the monetary policy committee had to \u201cmark up electricity inflation for this forecast round, even as other categories shifted lower.\u201d<\/p>\n\n\n\n Eskom\u2019s requested tariff increase, if approved, would also push up the cost of doing business, notably for the country\u2019s energy-intensive mining industry, as well as for many other businesses, at a time when economic growth in South Africa remains sub-par.<\/p>\n\n\n\n \u201cOn one hand, the Ministry of Finance insists Eskom must clean up its balance sheet,\u201d Mondia said. \u201cOn the other hand, a 36% hike in a fragile economy like South Africa is massive.\u201d<\/p>\n\n\n\n Minerals Council South Africa opposed the tariff increase, which it warned could lead to layoffs in a country where unemployment is above 30%.<\/p>\n\n\n\n \u201cElectricity tariffs for mining companies have increased by 165% between 2017\/18 and 2022\/23, putting marginal mines and associated jobs at risk,\u201d said its chief economist Hugo Pienaar.<\/p>\n\n\n\n
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