Mining wage

Eskom’s French-style pay deal poses danger to South Africa, experts say

from Eskom wage deal that beats inflation according to S&P Global Ratings.

Eskom this week signed a one-year agreement with three groups of workers for a 7% wage increase and an increase in monthly housing allowance. Although the agreement was terminated illegally and violent protests that have worsened blackouts in Africa’s most industrialized economy, it will add more than a billion rand to the payroll of the cash-strapped utility for the next 12 months. Eskom, which relies on government support to continue operating, said it will struggle to afford it.

“It’s suboptimal from a number of perspectives,” Omega Collocott, S&P’s corporate ratings director for South Africa, said in an interview. “The increase is higher than what Eskom had budgeted for, it is above the official inflation rate, which obviously sets a precedent to some extent, and the fact that it is short-term exposes us of course at the risk that we will be in the same situation by 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.

Data from the Bureau for Economic Research shows the Eskom deal is two percentage points higher than the average 2022 inflation rate seen by union officials surveyed in the first quarter. The electric utility’s one-year deal also contrasts sharply with five-year deals with mining giants Impala Platinum. 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 mechanism for emerging markets,” said Tatiana Lysenko, S&P chief emerging markets economist. “It’s more likely what you see in France with very strong and powerful unions.”

Although the Eskom deal influences inflation expectations, it will not affect monetary policy decisions in the current cycle of rising interest rates, she said. On the contrary, the South African Reserve Bank should continue to react to the aggressive tightening of US Federal Reserve policy and the impending Withdrawal a domestic fuel price subsidy that is expected to fuel inflation.

Still, there are “implications for the government’s fiscal position,” said Zahabia Gupta, associate director of sovereign ratings. It is that he can influence talks between the state and labor groups representing 1.3 million civil servants, whose demands for a 10% raise, increased housing allowances and other allowances have been rejected.

Remuneration accounts for almost a third of total government spending, and controlling it is key to the national treasury’s plans to reduce budget deficits and stabilize debt. Settling for higher-than-budget wage increases is a major risk to the fiscal outlook, S&P said in May, when it raised its outlook on South Africa’s risky debt to positive from stable.

– With the help of Colleen Goko, Paul Burkhardt, Amogelang Mbatha, Arijit Ghosh and Rene Vollgraaff.