The South African State-owned power utility’s inflation-beating pay deal struck with protesting workers sets a dangerous precedent for on-going public-sector wage negotiations that may add to price pressures and weigh on state coffers, according to S&P Global Ratings.
Eskom Holdings this week signed a one-year deal with three labour groups for a 7% pay hike and an increased monthly housing allowance. While the agreement ended illegal and violent protests that deepened electricity outages in Africa’s most industrialized economy, it will add more than 1 billion rand ($59 million) to the cash-strapped utility’s wage bill for the next 12 months. Eskom, which relies on government support to keep operating, said it will struggle to afford that.
“It’s sub-optimal from a number of perspectives,” Omega Collocott, S&P’s director of corporate ratings for South Africa, said in an interview. “The increase is higher than Eskom had budgeted for, it is above the official inflation rate, which is obviously precedent-setting to an extent, and the fact that it’s short term of course opens us to the risk that we may be in the same situation this time next year.”
Annual inflation accelerated to 6.5% in May, well above the 4.5% midpoint of the central bank’s target range at which it prefers to anchor price-growth expectations.
Bureau for Economic Research data show the Eskom deal is a full two percentage points higher than the 2022 average inflation rate seen by trade union officials polled in the first quarter. The power utility’s one-year accord is also in stark contrast to the five-year deals mining giants Impala Platinum Holdings and Anglo American Platinum sealed with some of their workers earlier this year.
“There is a structural problem here because the wage-setting mechanism in general in South Africa is not a typical emerging-market mechanism,” said Tatiana Lysenko, S&P’s lead economist for emerging markets. “It’s more likely what you see in France with very strong, powerful unions.”
While Eskom’s deal will influence inflation expectations, it won’t affect monetary-policy decisions in the current interest-rate hiking cycle, she said. Rather, the South African Reserve Bank is expected to continue responding to aggressive policy tightening by the US Federal Reserve and to the imminent withdrawal of a domestic fuel price subsidy that’s set to stoke inflation.
Still, there are “implications for the government’s fiscal position,” said Zahabia Gupta, an associate director for sovereign ratings. That’s as it may influence talks between the state and labour groups representing 1.3-million public servants, whose demand for raises of 10%, increased housing allowances and other stipends have been rejected.
Remuneration accounts for almost a third of total government expenditure, and keeping it in check is key to the National Treasury’s plans to reduce budget deficits and stabilize debt. Settling for wage increases that exceed budget provisions is a key risk to the fiscal outlook, S&P said in May, when it upgraded its outlook on South Africa’s junk-rated debt to positive from stable.