22 Mar The Economic Outlook For South Africa Without Zuma
End Of An Era – Out With Zuma And In With Cyril
South Africans across the globe have all given a collective sigh of relief as our former chief in charge, President Jacob Zuma, handed his reins over to our new President, Cyril Ramaphosa.
Zuma’s blatant disrespect for his fellow countrymen and women and the carelessness with which he’d wielded the powers with which he’d been imbued are, of course, what had set South Africans on edge and caused such an unconquerable divide between individuals and political parties over the years that he’d been in charge. For the grave concern all along has not been one of political affiliation or orientation, but of morality and accountability.
Under former president Zuma’s reign, South Africans had seen corruption infiltrate the very fabric of society, our economy held on by a thread by those in the upper echelons who still cared for rights and wrongs, and our taxpayer money go to anything but the poor, the needy or the necessities of the country.
But have we reached calmer seas? Rand Rescue takes a look…
Out with the old
It’s important to note that South Africans’ concerns with Jacob Zuma had not been limited to political convictions. In fact, most South Africans both within or outside the ANC, and of liberal or conservative view had all felt the same dismay at his blatant disregard for his duties and the fact that this had been left unchallenged and without consequence for so long.
But the tenuous thread with which he’d held onto his throne had been cut short prematurely by the ANC. Although premature, it had taken far longer for the party to oust their leader than when they ousted former president Mbeki, and one needn’t have in depth knowledge of politics to know that comparatively the criteria for ousting the two leaders had been almost laughably divergent and lopsided. Nevertheless, the man has been dethroned – but what lies in the wake of his exit?
Well, despite the fact that businessman Shabir Shaik was found guilty of bribing Jacob Zuma between 1995 and 2002, the former president had never been held accountable for his part of the illicit bargains, even though Shaik had been jailed. Zuma’s predecessor, Mbeki, had of course fired Zuma from his position as Deputy President following these allegations.
Zuma was further charged with rape, and corruption for receiving bribes from French arms company Thint Holdings, but is acquitted on the former and the latter charges are dismissed following the prosecution’s persistent delays during the case. It seemed Zuma’s party had a fairly short-term memory as he was reinstated as Deputy President in 2006 after being acquitted of the rape charges. This seemed rather counterintuitive, given that he’d been sacked for corruption charges which had been confirmed true in court during the prosecution of his co-conspirator. Nevertheless, the party had subsequently decided to oust President Mbeki due to accusations of misuse of power. Mbeki had accepted his party’s request to step down, and in stepped President Jacob Zuma.
He’d taken his seat at the helm of South Africa in 2007, but his past would not let him be as he’d assumed. New charges against President Zuma were introduced on 28 December 2007 which included charges of corruption, racketeering and money laundering. Unfortunately these charges are once more dismissed due to procedural issues in September 2008 and the dismissed charges are once more reinstated by the Supreme Court of Appeals in January 2009. Despite the Supreme Court allowing President Zuma to be prosecuted, the prosecutors bafflingly drop all charges against the president in April 2009.
In 2012, The Supreme Court of Appeals once more allows for previous charges which had been dropped may be challenged by the Democratic Alliance.
In 2016, the South African Constitutional Court rules that Zuma’s R246 million upgrade of his private home had been a contravention of his constitutional duties and orders the President to repay the money to South Africans. Later the same year, the courts rule that dropping the more than 700 corruption and fraud charges against president Zuma in 2009 had been an irrational decision and that the prosecutors should decide whether they want to reinstate charges.
Numerous no-confidence votes against president Zuma are motioned in parliament over the years, yet he manages to retain his seat each time.
In 2017, the Supreme Court of Appeals upholds the High Court’s ruling that the corruption charges against the presidency should be reinstated.
In February 2018 the ANC recalls president Zuma, and he resigns formally on Valentine’s Day 2018.
In the wake of his dismissal, the NPA has received several recommendations on the reinstatement of the criminal charges against former president Jacob Zuma, but it remains to be seen whether he will act more gallantly after his retreat than he had in the pole position. Chances are he will not – but one must consider how much power and dirty laundry someone who’d managed to hold onto his throne for so many years may have. Though we’re all looking for justice, we may have to hold our breaths a few years yet.
But what do we make of Zuma’s predecessor?
In with the new: Cyril in the seat
Let’s be honest, most of us had known Cyril Ramaphosa before his entry into the political sphere as a business mogul – someone who knows how to negotiate, work with money and lead businesses to success.
So, irrespective of our political affiliations or views of our president’s spiritual, racial or moral orientations, there’s no denying that Ramaphosa would be far better at steering the country towards a stable and affluent economy than his predecessor. And, given that his net worth is estimated at close to R6 billion, one may assume that it would be unlikely for our new president to rely on taxpayer money for upgrades to his home.
Though both Ramaphosa and Zuma had received several honorary degrees over the years, it should be noted that former president Zuma had not completed high school whereas Ramaphosa had gained his matric, obtained his B. Proc Degree as well as his B. Proc Law Degree through the University of the North. He’d further served as chairman, board member and/or non-executive director for, among other companies: Alexander Forbes, Bidvest, LONMIN, SABMILLER, MTN, McDonald’s South Africa, Standard Bank and more.
Both Ramaphosa and Zuma had been detained and jailed during apartheid years and both individuals had been outspoken against the apartheid regime at the time.
Unlike Zuma, however, Ramaphosa has a fairly clean record when it comes to business. One Scarlet Letter which our president will always bear and be held accountable for is the Marikana massacre which occurred under his watch while he was non-executive director of Lonmin. The massacre which occurred on 16 August 2012 had seen police open live fire on striking mine workers, injuring many and killing 34. In the wake of the massacre, however, a commission had been established to determine culpability, and no findings against Ramaphosa had been brought to light. Whether he’d been culpable or charged – it remains to be seen how victims of the event, and families of those victims whose lives had been taken will respond to Ramaphosa’s presidency and if he will be able to unite his party once more.
One thing we ARE certain of, is that the Rand has made significant inroads since Zuma announced his resignation. Not only did the Rand reach exchange levels last experienced in 2015 on the same day of his resignation, but it had managed to maintain a slow-but-steady downward slant.
And this, of course, is the best news for South African expats!
A new president for SA and new money for expats
With exchange rates seeing their best performance (Rand-wise) in years, South Africans abroad can finally get better rates for their rands. Consider, for instance, that compared exchange rates over the past two years have seen the rand drop from a devastating R16.50 in 2016 to R11.50 low against the USD in 2018 – all due to political decisions (with closing rates at the time of writing this article even lower).
What South African expats are raving about, of course, is that their rands will have far more value when converted to foreign currency now. For local South Africans who want to purchase goods from other countries or travel a bit, this is good news, but for those who want to transfer their pension, provident or retirement funds abroad it is EXCELLENT news. For although the exchange rate makes a difference on a minor scale, it has a profound bearing on large sums of money such as fund transfers.
Consider that an amount of R1 million would get you approximately $83 000,00 now, whereas it will have gotten you around $77 200,00 the same time last year and a mere $63 880,00 in 2016.
So, of course you’d want to wait to see what happens with the currency, but it’s important to keep in mind that the interim stability is not necessarily a full-proof bargaining chip.
Cashing in or staying put – the fundamental question
Of course, given the current political climate, it would be wise to keep an eye on the exchange rates in order to get the best possible rate for your rands.
But although things seem to be looking up there are important considerations you should think of.
One of these, of course, is how the Rand’s performance will impact the South African economy which has relied on exports for so long. It seems South Africa, in a move which completely counters the UK’s economic strategy since Brexit, can no longer rely on our imports to carry us through. This is, of course, bad news for industries which are already suffering due to drought such as our Wine, Farming and Agricultural industries, not to mention our mines. A weak domestic currency, although not a positive thing, stimulates exports and demand for local products and services. Should a country not cater for a discerned shift in supply and demand, it will have a discerned impact on the economy. Although the consumer price index sees relief after such changes, this is not necessarily a palpable relief.
One concern, for instance, is that Budget Finance Minister Malusi Gigaba, had raised value-added tax to 15% from 14% for the first time since South Africa had seen a democracy – a move which had made their principal opposition label them a “drunk government in power” just after congratulating them for ousting their former head.
The VAT increase, of course, points towards overall price hikes for South Africans. Across the board consumers are receiving notifications of rate and instalment changes for their goods and services. So, if a stronger rand should theoretically see a stronger local economy, the increased cost of living and curtailing of exports could spell problems for South Africa. Hiked costs within the country itself will not boost local production or imports as should be expected with a stronger currency, and with suffering exports, the country may be at the mercy of foreign investors who have a positive outlook on SA after Zuma’s fall. Nevertheless, such investors are not blind to a holistic projection of South Africa’s economy and our overall socio-economic climate.
But VAT doesn’t affect local costs alone – the new 15% VAT rate will apply to goods exported from South Africa as well (excluding direct exports which are exempt). So although the country itself “could” see higher income on exported goods, importers from other regions are unlikely to buy the same amounts from South Africa given the currency strength and VAT increase. Loyal importers will have to look elsewhere for their goods.
For expats, the VAT hike may not be that significant in their day-to-day dealings, but if you still have funds left in South Africa it’s imperative to consider how reliable the country’s economic decisions are and how much of a gamble you are willing to take on future exchange rates and economic growth.
As mentioned before, when taking the UK as an example, the announcement of Brexit has seen its currency slip in stark contrast to what will happen to South Africa, but they’ve pushed their exports to maintain a stable economy. This, in itself, is also seen as a gamble for economists and financial analysts, but for the time being it has kept the economy stable. South Africa, on the other hand, has chosen to penalise consumer in the wake of the first consumer “break” in years.
With VAT being hiked for the first time in almost 30 years just as the rand stabilised, one must consider what foresight the treasury had as to local buying power and expenditure. For although lower exchange rates should theoretically see lower costs of imported goods and services, in South Africa costs are rarely lowered and rather see a plateau. Cost of consumables, for instance are rarely dropped in accordance with exchange rates, whereas a VAT increase will see the cost of all goods and services increase. Though the VAT increases are predominantly aimed at higher-income earners, the problem is, of course, that higher income earners tend to foot the bill for entrepreneurship and job-creation. Whether small, medium or large enterprise, organisations will need to take another step back to add an additional 1% to all expenditure and curtail their own budgets.
The VAT hike had been attributed to mismanagement and a lack of tax collection by the Revenue Service under Zuma’s reign and the promise of free education for all South Africans. This has always been an expectation. But one may be sceptical of this move given that the economy has already bounced back a bit following his resignation. Another move which the new government (if this had been decided by the new or old is up for debate), had mentioned, is the budget-cuts on government expenditure over the next three years by approximately R30 billion. Sadly, these cuts are also aimed at local government which had been at the non-receiving end of handouts for many a year, additional cuts to local government will not support the filtration of funds towards the parts of our country which have seen the most economic drought. Like a river, we are merely cutting off the flow to the outer reaches of our society. Furthermore, although social grants will increase and zero-rated food (for basic supplies) will not be affected by the VAT increase, the latest budget cuts had also seen expenditure on human settlement development cut by R7.2-billion and non-essential goods will be more expensive for all South Africans. And despite Zuma’s resignation, Gigaba had placed SA’s economic growth for 2018/2019 at 1.5% which may be higher than the previous year, but not necessarily good considering the VAT increase, budget cuts and export conundrum. This, of course, is further exacerbated by South Africa’s debt to GDP ratio which is estimated to recover and stabilise in 2023, at 56,2%. And then we have to consider that South Africa’s borrowing estimates had increased by R20-billion since projections in 2017/2018. This is worrying given that the SONA address in 2018 had been given to a country with a far more positive outlook than it had seen in 2017.
VAT exemption applies to the following goods and services only:
- Financial services (including interest and premiums)
- Passenger transport by road or rail
- Educational services
- Residential accommodation excluding or holiday or temporary rented accommodation
- Management services for retired persons under sectional title, share block or housing development
- Membership contributions to employee organisations
- Goods while in storage or license by Customs or Exchange
- Sales by non-VAT vendors
- Export of certain goods given certain requirements
- Sales of enterprises as outgoing concerns
- Certain unmanufactured gold supplies
- Certain agricultural products
- Brown bread and brown meal
- Maize meal, samp, rice and dried mealies
- Dried beans, lentils, legumes and rice
- Canned pilchards or sardinella (excluding pet food and sardines)
- Milk, cultured milk, milk powder and dairy powder blends
- Vegetables and fruit
- Vegetable oil and eggs
- Illuminating kerosene (paraffin) used as a light or heating source
- Fuel levies on goods and petroleum
- International transport of passengers or goods to South Africa
- Services rendered outside South Africa
- Services supplied to non-residents of South Africa
The problem, of course, is that businesses and individuals will have to make up the expenditure shortfall on VAT by cutting costs on other things or raising their prices. So although they may not legally be able to claim VAT, they will have to hike their prices in accordance with their expenses. Consider, for instance, that cellular service providers had already raised their call rates since the announcement. For a country with a 100% cellular penetration rate (which translates to every individual having access to a cellular phone), cellular communication is the backbone of much of the lower-income market in South Africa, which means lower income entrepreneurs and self-starters may suffer under the VAT increases.
Furthermore, the hike in social grants will see our lowest-income South Africans earn a mere R100 more per month by the end of the year. Which will necessitate them to stick to non-VAT items, precluding them from this same sake concession on any other goods or supplies. While they will therefore have R100 more per month at the end of the year to see them through, their additional funds are not likely to give them any relief given.
Consider, for instance, that for items which are not exclusive of VAT, they will have to pay more.
Let’s take basic necessities for instance, the average South African will spend an additional:
- R30,84 per year on washing powder (1 kg per month, hand wash)
- R21,84 on white bread (1 x loaf per week)
- R41,04 on 1-ply toilet paper (2 x rolls per week)
- R15,42 on fresh water (5L x per month)
- R30,84 on corned meat (2 x cans per month)
- R34,27 on tuna (2 x cans per month)
- R17,13 on peanut butter (1 x jar per month)
- R6,43 on methylated spirits (1 x 750 ml bottle every four months)
- R5,36 on Panado headache tablets (1 x 24 bottle every four months)
- R25,69 on feminine hygiene products (30 per household per month)
- R2,78 on salt (1 x 125 g bottle every four months)
- R2,78 on gravy powder (1 x 125 g box every four months)
- R16,28 on candles (8 x candles per month)
- R6.39 on 2L Coca Cola (1 x bottle every two months)
- R5,14 on sugar (1 x 1 kg packet every three months)
- R16,28 on coffee (1 x 100 g instant coffee per month)
- R2,14 on plasters (1 x 20 packet every six months)
- R2,01 on matches (1 x 10 box every four months)
- R3,53 on no-name tomato sauce (1 x 750 ml bottle every four months)
- R42,85 on mixed pork offcuts (1 x 1 kg packet per month)
- R51,42 on bulk chuck, shin or brisket (1 x 1 kg packet per month)
- R111,42 on chicken (1 x 4kg mixed bag of per month)
- R10,28 on spaghetti in tomato sauce (1 x tin per month)
- R9,42 on bleach (1 x 750 ml no-name bottle per month)
- R36,85 on pet food (1 x 1,75 kg dry pellets per month based on dog food; adult dogs require between 520 g and 1080 g pellets per day)
- R8,56 on soap (1 x 100 g bar per household per month)
- R12,29 on flour (1 x 1 kg bag of flour per month)
- R4,28 on light bulbs (1 x 42 W light bulb every four months)
- R5,711 on shampoo (1 x 500 mL bottle per household every three months)
- R17,13 on margarine (1 x 500 g regular cooking margarine per month, non-spread)
- R7,43 on Bovril spread (1 x 125 g spread every four months)
- R37,68 on tomato and onion mix (4 x tins per month)
- R6,85 on toothpaste (1 x 50 mL tube per household per month)
- R3,43 on Exam pads (1 x exam pad every four months per household)
- R2,14 on pens (1 x 3 pack Bic pens per year)
Then you can see where the problem comes in – the total increase in costs although not aimed at the poor, will still affect South Africans of all backgrounds and income groups. And although financial services providers will not raise their VAT rates, they will have to cover the costs of their own VAT payments by hiking rates in other ways. Unless low income South Africans maintain their low-income lifestyles social grants will not mitigate the effects of VAT increases – in fact, they could end up worse off than before.
While something like maize meal or brown bread will therefore have 0% VAT, the industry as a whole will need to increase costs (with the Competition Commission ever-watchful) in order to remain operational.
One cannot wholly blame the treasury for its decisions – as they’d mentioned, the economy is in need of reform and recovery, and such recovery is rarely easy or comfortable. But many analysts believe such reform and recovery may have been achieved by other means.
For South African expats, the question is when the best time is, or will be, to transfer their funds abroad.
The answer? Well, there surely is just no way of knowing. South Africa’s economic outlook is surely more colourful than it had been under Zuma’s reign, but Gigaba, Ramaphosa and even Abrahams with the NPA have their work cut out for them – finding a balance between diplomacy, conviviality and good old common sense has been a hard find for previous leaders and decision-makers, and although our new leader has business sense which had fallen short of his predecessor – he had undoubtedly not overseen the reform and recovery of an economy of a whole country and its people before. It is a mammoth task which lies ahead.
Time to rescue your rands
Rand Rescue can assist with all your financial needs as an expat. With offices globally, we’re the go-to guys for saffas abroad who want to convert their rands to foreign currency or need to transfer the proceeds of their policies, retirement funds or other financial assets abroad.
Just leave your details and we’ll call you for a free consultation to discuss your fears, needs and requirements for moving your funds across borders.