South African Economy In A Downward Spiral
Much has happened in the past few months — both locally and internationally — to send the South African economy on a tailspin.
For our expats living abroad or those contemplating relocation, there’s never been a more crucial time to consider your options and take an objective and in-depth view of SA’s future. Rand Rescue covers some of these points below.
Impact from within and without
Though the main focus of our article is on events occurring on SA soil, it should be noted that there are several international occurrences which further compound SA woes.
Consider the trade war between the USA and China, for instance. Though theoretically there may be peripheral benefits for SA — such as China increasing agricultural imports from SA, or both the USA and China could source more tech products from SA in the wake of their respective embargoes — South Africa has little weight to throw about should either of these countries decide to penalise nations who purchase from their enemies.
Furthermore, the type of tech and agricultural products which these countries desire aren’t quite on SA’s list of big exports (nor do we necessarily have the capacity to produce these products). Given that both the US and China are seeing major losses as a result of the trade war, it is also likely that funds which may have previously been allocated for international investment will be rerouted to local sources and away from SA’s investment kitty. Investors are simply selling off the rand in favour of other emerging currencies, such as the Turkish lira.
And of course, Trump’s tariff increases and levies for all countries earlier this year has rendered all the Africa Growth and Opportunity Act (AGOA) hullabaloo under the Obama administration a bit of a fruitless exercise.
And what of the Brexit? Well, if we want to consider the bright side, then the dramatic currency depreciation under the fears or a no-deal Brexit may have some hypothetical value — a weaker Sterling means cheaper buying from abroad for saffas, cheaper property prices in the UK, cheaper imports from the UK and so on and so forth.
But of course, that’s not quite how the world economy works and as we’ve seen in the past, as the economic powerhouses of the world take their knocks, the ripple effect sees the Rand battered down as well. Furthermore, for those who have invested in the UK, the value of those investments falter as well.
Analysts warn that things are unlikely to get better soon. Since the Brexit referendum, the sterling has fallen 15% against the euro and is weaker than it was during the 2008 financial crisis.
There is also the Nigerian-South African bickering looming over our heads. Following a Nigerian takeover of the Johannesburg CBD and subsequent SAPS intervention, the National Association of Nigerian Students (NANS) has demanded that South African businesses be expelled from Nigeria. These businesses include MTN, Shoprite, Multichoice, South African Airways, Game and Standard Bank.
NANS president, Danielson Akpan, has further instructed South Africans in the country to make their exit as well, stating that the association would take action against saffas in the country.
The National Health Insurance (NHI) proposed for SA may not have a direct impact on saffas living abroad who have emigrated financially, but for those still living on home turf or with financial assets left in South Africa, it may be devastating.
Not only is the NHI providing a significant push for medical professionals to relocate, but it may also cripple some of the biggest companies in SA while pushing up taxes.
NHI membership (commencing 2025/26) would be mandatory and require compulsory prepayment to the NHI Fund based on an individual’s ‘ability-to-pay’. No person would be able to opt out of the mandatory prepayment, irrespective of whether or not they use the benefits and medical aid contributions paid through employers to aids would be reallocated to the NHI Fund. If the NHI will allow for private medical aid contributions as a ‘top-up’ health insurance for the listed treatments and diseases, an individual would now have to make contributions to the NHI and private medical aid.
The amended NHI proposal presented to parliament, however, states that current private health insurers will no longer be able to provide cover for treatments covered by the NHI. The current suggested treatments are:
- preventive, community outreach and promotion services
- reproductive health services
- maternal health services
- paediatric and child health services
- HIV, AIDS and tuberculosis services
- health counselling and testing services
- chronic disease management services
- optometry services
- speech and hearing services
- mental health services including substance abuse
- oral health services
- emergency medical services
- prescription medicines
- rehabilitation care
- palliative services
- diagnostic radiology and pathology services
This, of course, will see some of SA’s biggest economic giants – Discovery, Momentum Metropolitan, Bestmed, Bankmed, Bonitas, Medishield (to name a few) take a giant knock as they will no longer be authorised to provide medical cover for these treatments. This could consequently see a significant lay-off of employees as well as a drop in investment for medical aid groups. In fact, Discovery had already seen a 11% drop in share price at the mere introduction of the updated proposal, the drop was later paired to 5%.
What’s more, individuals will no longer be able to:
- Visit any doctor or hospital of their choosing
- Receive payouts to doctors or for medication unless the NHI has determined that a medical necessity exists for the service and that the treatment is cost-effective
- Visit specialists without approval of a nurse or doctor at their primary registered healthcare facility
The Davis Tax Committee (DTC) which had been mandated by the Minister of Finance to ‘inquire into the role of the tax system in promoting inclusive economic growth, employment creation, development and fiscal sustainability’ had, under its mandate, evaluated the proposed funding of the NHI and scrutinise the NHI white paper.
The original ‘guesstimate’ for the cost of the NHI was placed at R255 815 billion (as of 2025/26 ) using 2010 cost estimates. But what of funding shortfalls? Funding would clearly be highly sensitive to economic growth projections — a 5% growth rate would see an NHI shortfall of R27 billion whereas a 2% growth would see a shortfall of R108 billion. With SA’s GDP growth for 2019 placed at 1.5%, down from 1.7% as projected in 2018, the question remains how those funding shortfalls for the NHI would be accounted for and remedied.
In addition to existing medical aid contributions being diverted to the NHI, where else would funding come from? Taxes of course. And yet, the DTC states clearly that such a form of funding would be highly problematic for a country like South Africa with its high unemployment rate and low disposable income — this is especially applicable where payroll taxes are concerned.
In fact, the DTC points out that most of the very wealthy South Africans earn their income from investments and do not, in fact, contribute payroll taxes. It would therefore be left to those earning a moderate income to foot the bill. The proposal is therefore to restructure tax overall by:
- increasing VAT
- raising duties on alcohol and tobacco products
- utilising securities, transfer tax, estate duty and carbon tax for NHI
- phasing out medical tax credits (claims from SARS)
Another proposal for facilitating NHI funding is the renegotiation and restructuring of medical schemes. This, of course is where concern for medical providers, medical aids and service levels comes in. A restructuring which would lead to ‘cost-cutting’ or freeing up funds would mean less money towards the last-mile providers and private funds with a high risk of retarded job creation. And will these newly structured healthcare facilities and carers be able to provide the level of care and service middle-to-upper classes have come to expect? Would they want to remain in the country?
The last question we should ask ourselves is how the poor (the ones whom the NHI aims to uplift) will benefit from universal healthcare when taxes are raised across the board and job creation — which is already low — comes to a standstill? If so much of public funding is used for healthcare, will the necessary funding (and necessary increases in funding) for job creation, public infrastructure and sanitation, crime prevention and education not be affected? We’ll have to wait and see.
Though Cyril Ramaphosa came out the blocks with quite a bang after taking over from former president Jacob Zuma, it seems the leader’s hold on his party, his investors and his country is slipping.
Earlier in August, corporate South Africa — who had backed the president up until now — had voiced its concern for the presidency’s sluggish approach to SA’s debt crisis and SOE reform.
Though one might put forth that the president was handed a rather impossible task given the backlog of issues which had plagued SA before he took the helm, there’s no denying that what the country had needed all along was a stern hand and decisive action.
News that Ramaphosa had deliberately obscured the source of donations for his CR17 presidential campaign had dealt another blow to the chief-in-charge. Public protector, Busisiwe Mkhwebane revealed to parliament that president Ramaphosa had deliberately mislead the country about a R500 000 donation from Gavin Watson through Bosasa and had breached the Executive Ethics Code in the process. The president had fired back, stating that the information had been obtained illegally, and had applied to the Pretoria High Court to have the information contained in Mkhwebane’s report sealed.
Some of the donors alleged to have funded to the presidential campaign include:
- Nicky Oppenheimer: SA’s richest man — R10 million
- Raymond Ackerman: Pick n Pay owner — R1 million
- Maria Ramos: ex-ABSA CEO and PIC executive — R1 million
- Johnny Copelyn: eNCA owner — R 2 million
- ABSA Nation Building — R10 million
- Eskom executives (former and current) — R1,8 million
- Andre Crawford-Brunt: Sygnia board member — R2 million
- Anonymous donor — R120 million
An email leak exposé by News24 established that although Ramaphosa had claimed not to have been involved with campaign fundraising, that he had personally typed a note to instruct a R20 million transfer from his money market account (the Ria Tenda Trust)
The debacle has turned into somewhat of a muddled mess, with Mkhwebane also implicating finance minister Pravin Gordhan in misconduct. The courts have slammed back at Mkhwebane, stating that her emotions are clouding her judgement, alluding to her own potential misconduct.
In the shadow of all this trash-talk and dirty laundry wrangling stands the South African public, watching events unfold with a gloomy foreboding. For, of course, we’ve seen this all before. Sadly, we know all too well the consequence of such squabbles between our public protector, president, minister of finance and prominent businesses.
We know all too well the cost to the taxpayer when these ladies who doth protest too much maintain their mudslinging for years on end at the expense of their country. And we’ve felt the blows on our pocket as the rabbit-hole of corruption swallows an economy barely holding on.
And yet there seems to be fairly little to be done other than holding on for a rough ride ahead.
There’s not much to say about Eskom which we haven’t mentioned in previous articles, and yet each time we imagine things are at an all time low, the electricity utility manages to astound with more acts of defiance and foolishness to plunder the purses of the nation.
At the beginning of August, the Treasury announced an auctioning off of R1,2 billion bonds to bail out the embattled utility. The announcement had come shortly after a R59 billion bailout was actioned under the special appropriation bill and the government’s revised funding strategy. Eskom’s overall debt had been estimated at R441 billion at the end of March 2019.
Credit rating agencies S&P Global Ratings, Fitch and Moody’s have downgraded South Africa’s credit rating outlook from stable to negative. Both Fitch and S&P hold South Africa’s creditworthiness on BB+ — sub-investment grade — while Moody’s has maintained SA on Baa3 rating — the rung just before junk status. Yet all rating agencies are in agreement that the Eskom bailout is not sufficient and that the lack of direction and action are placing the country’s economy under tremendous strain.
Although Moody’s stands alone in its investment grade rating, investor sentiment had already veered towards junk status. Compared to other countries with a similar Baa3 rating, South Africa’s average local-currency yields are rising and the cost of insuring SA’s debt against default is higher than countries with similar ratings such as Russia and Brazil.
Auditing and advisory firm BDO highlights the following implications of junk status:
- Increasing inflationary pressure and impact on cost of living
- Exchange rate devaluation
- Interest rates increases which will result in more expensive debt
- Lower foreign direct investment in SA
- Possible redistribution of the country’s capital resources
- Low economic growth
- Increase in tax rates to supplement revenue collection by Treasury
- Decrease in grants and social security payments
And yet despite Eskom’s woes and claims that it cannot supply electricity consistently to South Africans without load shedding, it still sells electricity to seven other countries which energy expert Ted Blom affirms is often sold at a lower cost than local electricity. And while Eskom has a surfeit of 66% employees according to the World Bank, its managers had already demanded pay hikes of 4,7% and warned of protest action should such raises not be provided.
Approximately 200 upper managers currently earn between R1,5 and R3 million per year and the additional pay hikes would cost the company between R200 and 300 million. Middle management (approximately 6 500 employees), with salaries between R700 00 and R2 million a year, are demanding an increase of 7,5%.
JSE listed company scrapping
Corruption is not a new term for South Africa, but at the eve of Ramaphosa’s takeover from Zuma, saffas had at least held out hope that the word would fall out of use in a few years.
Unfortunately, the JSE has indicated that this is not the case.
Independent wealth managers, Austen Morris Associates, have stated, “In the last year it seems there is barely a week that goes by without a former favourite South African share collapsing in price because of outright fraud, corporate governance failings, corruption or sheer incompetence.”
Some of the companies who have faced investor withdrawal include EOH, Tongaat Hullett, Group 5, Steinhoff, Aspen, Omnia, Brait and Mediclinic.
The JSE crash which started in 2018 has been called the longest downturn in SA business cycles since 1945, with 36% of JSE listed companies having depreciated with more than 15% in 2018 alone. Since 2018, 27% of all JSE listed companies had taken a further knock to fall to their lowest level in a year. These companies/institutions include:
- The JSE itself
- First Rand (FNB)
- The Foschini Group
- Arcelormittal SA
- HCI (eTV)
- Hyprop (Hyde Park, Canal Walk, Rosebank Mall, Cape Gate
- Mr Price
- Vukile Property Fund
- Rand Merchant Bank
- Super Group
- Tsogo Sun (Montecasino, Sandton Sun)
- Pick n Pay
- Old Mutual
The FTSE/JSE Africa Banks Index had already fallen 6.6% in 2019 compared to a 1.1% drop by emerging-market peers, and as if these woes weren’t enough, SA’s biggest financial union is threatening a strike of 73 000 members which Bloomberg called the largest industrial action in almost a century.
Austen Morris Associates further warns that many South Africans may not be aware that they are exposed to these companies via their pension funds, retirement annuities and exchange traded funds. Nick Petro, senior consultant at the firm, has advised South Africans to take their money offshore as soon as possible.
SARS and the Nugent report
Given the approaching amendments to the Tax Act which would see South African expats have to fork out for their offshore income, it is another point of dismay that the authorities who make these taxation decisions are riddled with ineptitude and misconduct.
Not only has the revenue service lost 1 000 qualified employees, but the Nugent Commission of Inquiry’s report into Tax Administration and Governance by SARS has pointed out widespread misconduct within SARS ranks.
The report has, among other things, seen the precautionary suspension of three executives:
- Hlengani Mathebula, Chief Officer: Governance, International Relations, Strategy and Communications
- Teboho Mokoena, Chief Officer: Human Capital & Development, and
- Luther Lebelo, Group Executive: Employee Relations have all been placed on precautionary suspension
The report further pointed to reckless actions by commissioner Tom Moyane, Ivan Pillay and Peter Richter and Luther Lebelo. The Public Protector’s report on the SARS rogue unit further holds that former SARS commissioner Pravin Gordhan had violated the constitution by establishing the SARS rogue unit.
Gordhan has since won a temporary interdict against the Public Protector to suspend the implementation of Mkhwebane’s remedial orders while the report is reviewed.
What about an IMF bailout?
With SA’s GDP slumping to its lowest spot in a decade and an economic collapse seemingly imminent, many analysts had believed the International Monetary Fund’s recent statements had been aimed at SA and indicated a possible bailout.
Business Maverick had, however, determined that the following statement had been aimed at Pakistan, and not at SA, and that news of a bailout were unfounded:
“Structural weaknesses remained largely unaddressed, including a chronically weak tax administration, a difficult business environment, inefficient and loss-making SOEs, amid a large informal economy. Without urgent policy action, economic and financial stability could be at risk, and growth prospects will be insufficient to meet the needs of a rapidly growing population.”
And yet an IMF bailout may still be on the cards.
What would such a bailout look like? Well, seeing as it would be a first for SA, we have no historical point of reference, and yet we can look to bailouts elsewhere to gauge some of the repercussions. The IMF only intervenes where it can demand extreme structural reforms and economic austerity.
Bruce Whitfield from 702’s Money Show had asked Sygnia Group’s CEO Magda Qierzycka and Head of Capital Markets Research at Intellidex, Peter Attard Montalto, to weigh in on the issue.
Both pundits stated that an IMF bailout is not immediately on the cards, but that we’re a mere few steps away from such action given the political infighting and economic crises. According to these experts, reform would require widespread retrenchment, privatisation of entities and the introduction of prescribed assets.
Reserve Bank woes
While the country is on fire, it seems almost inconceivable that one of its strongholds, the South African Reserve Bank (SARB) would also face an imminent marauding.
And yet, as financial experts are arguing in favour of privatisation, the ruling party and our president have made it clear that they aim to nationalise the SARB. Another mixed message touted by the presidency who clear at the World Economic Forum in Davos at the start of 2019 that the independence of the SARB was inviolable.
Though the change in the president’s sentiments has been put forth as a positive move for job creation, analysts, investors and rating agencies are seeing it as a move to interfere with SARB’s mandate. This view is echoed by SARB governor Lesetja Kganyago who has made it clear that he intends to fight tooth and nail to maintain its independence and reiterated that nationalisation would not solve SA’s economic crisis.
The political squabbling does not end there, as Kganyago has since sued ANC councillor Andile Lungisa following Lungisa’s public Twitter rants calling the SARB governor a “dutiful servant of racialist superiors” and an “exceptional k****r”. Such social media slander seems to have become the norm in politics — used by the likes of Donald Trump, Ali Sadjady, Helen Zille, Joseph Russo, Floyd Shivambu, Nigel Farage, Boris Johnson, Julius Malema, Rick Perry, Ted Cruz and Mitch Fifield, to name a few.
But as we sit back and watch these petty projections play out online, we should ask ourselves if this is the calibre of leader we want to rule our countries and businesses.
Where to go from here?
Though Rand Rescue can certainly not hand out advice across the board for all South Africans, all signs point towards a financial exit being most favourable for many saffas.
If you require assistance with your cross-border finance, taxation, foreign exchange and financial emigration, we’ve the necessary experience and accreditation to assist you in moving your financial assets abroad.
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