SOFIA (Bulgaria), June 17 (SeeNews) – Unlike mature Western European economies, where the impact of the current surge in fuel prices is more or less the same, the impact on emerging economies in Southeast Europe varies widely, analysts say.
Bulgaria, which has one of the highest inflation rates among European Union member states, seems to be most affected by rising fuel prices, while smaller economies in Southeast Europe like Macedonia, or countries with their own crude oil supplies like Romania appear to be less affected than Western European economies.
“In more developed economies we see transportation to be more efficient and cheaper than in SEE economies, which is contributing to lower inflationary pressures,” said Zdeslav Santic, an analyst with Croatia's Raiffeisenbank Austria Zagreb.
Although Germans pay twice as much for utility costs than they pay for food, and unlike Southeast Europeans, who spend three times more on food than on utility costs, the impact of fuel prices on inflation in the key European economy is still lower than in Southeast Europe thanks to higher energy efficiency. Bulgaria’s economy uses twice as much primary energy for the production of a unit of GDP compared to the bloc's average.
Also, although Romania, Bulgaria, Croatia, Bosnia and Serbia have their own oil refineries, most of which process mainly Russian crude that is cheaper than OPEC and Brent blends, the refineries' outdated equipment leads to lower quality of output and higher fuel consumption, erasing the effect of lower production costs.
Improving the quality of domestically-produced fuels could reduce consumption by 15%, Jurij Bajec, analyst at Belgrade-based think tank Economics Institute, told Serbian daily Danas.
Another common issue for the region is that prices of utility services are still regulated by governments and have not reflected market movements for years. In addition, the dominant position of mostly state-owned utility companies in the region has been a barrier to increasing efficiency and cutting production costs.
“So, with the strong increase of oil prices, we recorded a strong increase of utility services’ prices," said Santic, giving as an example Croatia's state-owned power distributor HEP that has sought a rise of more than 50% in electricity prices.
After shunning electricity price hikes for years, now Bulgaria and Croatia are facing economic shocks from planned hikes of 15% to 20% as of July 1.
In Bulgaria, for instance, government-regulated prices are preventing E.ON, CEZ and EVN that own electricity distribution and generation units, to invest in development. The utility companies have warned that regulated investments in the sector and a fixed ratio of return on investments of 12% threaten their profitability and restrain development of infrastructure and construction of new facilities in the country, where communist-era generators and power grid dominate.
Analysts also agree that governments that mull cutting excise duties on fuels and capping the increase in electricity prices to keep households happy are harming energy companies and electricity-intensive businesses and will create no long-term benefits.
A key impact of rising fuel prices in southeast European economies is the parallel increase of food prices, which have higher weight in the inflation indices in those states than in Western Europe.
Bulgaria had the highest yearly rise in food prices through April, 25.4%, among the EU-27 and seems more vulnerable to inflation pressure in the long run.
Its neighbours Romania and Macedonia are not much worried by the inflationary pressure from rising fuel prices. Romania, also a EU member, meets 40% of its fuel consumption from domestic oil and fuel prices there have risen by just 17% so far in 2008.
“There is no reason to think that the cost of production has increased that much, so the price should be lower than in other countries, but of course there is an international market and we see prices growing in Romania too,” said Nicolae Covrig, financial analyst with Raiffeisen Bank in Bucharest.
Macedonia’s central bank sees fast lending growth and sharp pay hikes unaccompanied by rise in productivity generating higher inflation pressure than rising fuel prices.
Production prices in Macedonia’s industry depend more on electricity than on oil, as the country exports mainly ferroalloys and steel products, said Marjan Nikolov, head of Skopje-based independent Centre for Economic Analyses (CEA).
He said Macedonia should increase its electricity generation capacity and develop its gas infrastructure to support economic growth rather that try to combat the surge in fuel prices.