MTBPS: Electricity price hike scenario is not detailed

The Treasury said they had not explicitly detailed what would happen to consumer inflation and economic growth if a 36% electricity price hike is implemented next year. Picture: Courtney Africa/Independent Newspapers

The Treasury said they had not explicitly detailed what would happen to consumer inflation and economic growth if a 36% electricity price hike is implemented next year. Picture: Courtney Africa/Independent Newspapers

Published Oct 30, 2024

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The Treasury said they had not explicitly detailed what would happen to consumer inflation and economic growth if a 36% electricity price hike is implemented next year.

The baseline forecast, which assumes no policy changes, assumes electricity price increases of 12.3%, 11.4%, and 9.6% in years 2025, 2026, and 2027, respectively. This results in average annual consumer inflation of 4.4%, 4.5%, and 4.5% for the relevant years, while gross domestic product (GDP) growth rates are 1.7%, 1.7%, and 1.9%, respectively.

Instead, the Treasury had modelled two scenarios. The first is faster implementation of structural reforms, while the second one assumes slower global growth. The scenarios only project gross domestic product (GDP) growth rates, not consumer inflation.

Scenario A incorporates additional capacity from energy investments, coupled with effective moves by the National Logistics Crisis Committee to resolve problems in ports and certain rail corridors. These reforms would enhance productive capacity, build confidence, and reduce the sovereign risk premium. In Scenario A, real GDP is 2.4 percentage points above the baseline forecast by 2032 as supply-side constraints are alleviated, raising capital stock accumulation and yielding productivity improvements that support overall trade volumes. That means that in 2025, GDP growth would rise by 2.8%, followed by an increase to 3.1% in 2026 and 3.6% in 2027.

Scenario B incorporates slower-than-projected global growth in 2025 and possibly into 2026. This reduces commodity demand and global trade, with significant knock-on effects for South African exports. Additionally, weaker growth heightens risk aversion towards emerging and developing economies as investors shift to safe-haven assets in advanced economies, reducing South African financial asset prices and weakening the rand.

Real GDP underperforms in the near term, before levelling off 0.5 percentage points below the baseline forecast by 2032. That means that in 2025, GDP growth would slow to 1.4%, followed by an easing to 1.3% in 2026 and 1.4% in 2027.

The Bureau for Economic Research at the University of Stellenbosch has said 3.3% growth in 2025 is achievable if the structural reforms undertaken by Operation Vulindlela are fast-tracked.

Anchor Capital said this week that growth around 4% is possible once the structural reforms have been bedded down and domestic as well as foreign investors buy into the inclusive economic growth opportunity as they did during the Thabo Mbeki Presidency when, for several years, GDP growth was near 5%.

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