Speaking after NERSA’s announcement that it has approved ESKOM’s application to increase electricity rates by 9,4%, SEIFSA Chief Economist Henk Langenhoven said NERSA’s decision to approve Eskom’s application would have a crippling effect not only on the embattled metals and engineering sector, but also on the South African economy.
Mr Langenhoven added that collectively the mining, construction, auto and metals and engineering sectors contribute nearly 20% of South Africa’s gross domestic product, hence sustaining these important sectors is crucial for the economy.
“The performance of these sectors has deteriorated significantly since June last year and the outlook for the next two years remains dire. The approved electricity hike will have a crippling effect on these sectors in general and the already declining metals and engineering sector in particular. The metals and engineering sector exports 60% of its production and international competitiveness is key to survival. This electricity cost increase will erode it even further,” Mr Langenhoven said.
Production in the metals and engineering sector has not recovered since the 2008/9 financial crisis and has deteriorated further since June 2015. Production is currently 30% below the peak of 2007.
Mr Langenhoven said that most of the impact of the electricity tariff increase would be felt through the direct effects of electricity prices, which have a weight of 4,13% in the consumer price index basket. This does not show the impact on producers, of course.
The indirect effects are estimated at 0,5 percentage points during 2016,” Mr Langenhoven said.