If ever there was a perfect example of South Africa requiring a burning platform before taking decisive action on the economy, it’s encapsulated in Home Affairs Minister Malusi Gigaba’s eventual climbdown on some of the more damaging elements of the destructive visa regime he implemented on his first sojourn at that department.
It has taken Gigaba three years to implement just some changes to the visa regime which, as tourism and business lobby groups have pointed out from the start, are damaging to the economy.
The amendments, if anything, serve to muddy the waters even further when it comes to visa requirements.
The new measures – which are touted as enabling regular business travellers to get extended visas, reducing requirements on citizens from selected countries to get access to SA, and finally the dropping of the ludicrous demand that the parents of foreign children carry additional documentation in addition to their passports to get access to the country - will require the retraining of legions of civil servants who are barely attuned to the last set of maddening rules.
It’s impossible to quantify exactly how much damage has been done to tourism over the past three years as government messaging around visa requirements varied between the murky to the destructive.
Some 13,000 families are reported to have been turned away from boarding flights to South Africa because they didn’t have the appropriate documentation demanded by South Africa’s Home Affairs department. It’s unclear how many more would simply have made alternative travel choices rather than be lumbered with the inconvenience of restrictive rules.
The effort taken to visit South Africa has seen the country significantly underperform in a booming global industry, which is currently growing north of 5% a year. Grant Thornton puts growth in tourism numbers to South Africa at half that.
It’s a massive wasted opportunity.
President Cyril Ramaphosa flagged tourism as one of the critical elements of his stimulus plan for the country. There is a direct correlation between an increase in visitor numbers and jobs created in the industry. The tourism industry calculates that one new job is created for every nine additional tourists to the country.
South Africa’s tourism numbers are blurred by the inability of Home Affairs to distinguish between migrant workers who repatriate a large portion of their earnings, and those whose spend goes directly on tourism and domestic consumption. Greater clarity is needed in defining the difference between genuine tourism, business travel and those who travel across borders for work.
The Tourism Business Council of South Africa, while unimpressed with the visa changes, is appealing for their speedy and efficient implementation to ease the burden on travellers this season. The reality is that foreign tourists going to long-haul destinations like South Africa plan significantly in advance and the changes are unlikely to have any real impact on the current tourist season. There is an immediate effect of bad regulation and a lag in repairing the damage it has caused.
Home Affairs' belligerence on domestic travellers requiring permission to travel out of the country by non-travelling parents and to carry unabridged birth certificates in addition to passports, remains a ridiculous bureaucratic burden for South Africans looking to travel abroad. The decision to force parents to grant permission for every trip was based on fake data of child trafficking from South Africa and remains a serious impediment to travelling families.
There is progress in other areas.
Visitors from China and India will no longer have to travel in person across the vast expanses of their respective countries to apply for visas in person, but will be allowed to use intermediaries. The long overdue introduction of biometric movement control systems at the country’s busiest airports should go some way to reduce congestion on arrival at South African ports of entry. Speed and implementation are of the essence.
Ramaphosa’s planned stimulus package announced on Friday showed that government was coming to terms with the fact that “business as usual” was no longer working. He promised greater clarity not only on tourism, but mining and land reform too.
Ratings agency Fitch, which already has a sub-investment grade rating on South African debt, has expressed reservations about the significance of the measures unveiled by the president last week amidst concerns that Moody’s, the only major ratings agency which retains an investment grade rating on SA, is considering the soundness of its position.
In his address to the UN in New York this week, the president used the opportunity to quell concerns about policy and the impact of land reform on property rights. The movement on visas, while positive, is hardly the radical overhaul needed to announce South Africa is open for business.
The president has tasked a group of veteran business leaders including former Standard Bank CEO Jacko Maree and the former finance minister and now Old Mutual chairperson, Trevor Manuel, with raising $100bn in foreign direct investment over five years.
Ramaphosa will be hoping that by talking up opportunities for reforms, he will encourage South African CEOs to loosen the purse strings on the so-called “lazy capital” locked into domestic balance sheets. Perhaps we should use the term “petrified capital” which like fossilised wood has turned to stone is immovable and stuck in time.
Our messaging around SA being open for business needs to change quickly if we are to grasp the nettle on an economic rebound.
Bruce Whitfield is a multi-platform award winning financial journalist and broadcaster.
Household consumption slipped in the second quarter of 2018 as people adjusted their spending habits following the VAT hike and fuel price increases, according to the South African Reserve Bank’s quarterly bulletin released on Tuesday.
The SARB noted that household spending was also suppressed by “diminishing wealth effects” in the first eight months of 2018, as the FTSE/JSE All-Share Price Index fell on a combination of negative sentiment towards emerging markets and domestic policy uncertainty, relating to how land expropriation without compensation would play out.
Consumers have been hard hit by the VAT hike from 14% to 15%, effective from April 1 and five successive months of fuel price increases.
The research note by the central bank painted a grim picture of the economy
falling into recession in the second quarter of 2018, with negative gross domestic product growth in the first six months of the year and unemployment rising to 27.2% in April, May and June.
However in contrast to falling consumer expenditure, state spending increased with government contributing positively to GDP figures in the second quarter of 2018.
Household credit growing steadily
The Reserve Bank reported that while the household credit market remained “very subdued” during the second quarter of 2018, growth in household credit extension continued to trend steadily upwards over this period. Loans to the private business sector remained subdued and increased at a slower pace.
While households are battling the impact of the VAT increase, government’s finances are in slightly better shape due to the one percentage point hike. Former Finance Minister Malusi Gigaba said in February that the VAT hike was expected to
raise an additional R22.9bn.
The central bank's quarterly bulletin stated that the cash book deficit of national government was much smaller in April, May and June, than the previous year as revenue was boosted by the tax hikes.
The rand decreased against the US dollar by 10% in the second quarter, following the local currency’s relative strength in the first part of the year.
The Reserve Bank said the rand’s weakness was largely due US dollar strength, higher international oil prices, increased global inflation and risk aversion towards emerging markets.
SAA is considering selling off assets after banks have refused to lend it any more money – and its debt ballooned to R15bn more than its assets at the end of July.
A senior SAA executive told City Press this week that the airline’s finances are in tatters and the Auditor-General has raised serious concerns about its viability.
SAA, which is technically bankrupt, will therefore not present its 2017/18 financials to Parliament by the end of this month, as required by law.
Senior SAA staff and a confidential report, presented at the company’s board strategy session 10 days ago, reveal that the airline’s management is now looking at a number of aggressive cost-cutting measures, including selling off its catering arm, Air Chefs, and outsourcing or selling SAA Cargo.
A top official at the national carrier told City Press that in the meantime, the company would look to government for more bailouts because banks have “hardened their attitudes” and are “continuing to refuse” to lend it more money, despite Treasury guarantees.
SAA has about R19.1bn worth of government guarantees.
In September last year, Treasury gave SAA a R3bn cash bailout to avoid defaulting on a Citibank loan.
The report, a turnaround strategy document which SAA chief executive Vuyani Jarana presented to the board last week, reveals that:
- On March 31, the last day of the 2017/18 financial year, SAA had R13bn in assets and R26bn worth of debt. But by July 31, the company’s assets remained at R13bn while its liabilities burgeoned to R28bn;
- The airline will record a R6bn loss by the end of the current financial year;
- SAA Technical (Saat), which has suffered significant losses to “fraud and theft”, is bleeding money, losing up to R560m a year in penalties from poor turnaround times for aircraft repairs and maintenance;
- SAA’s monthly costs, ranging between R350m and R450m, are significantly higher than its revenue and are not coming down fast enough; and
- SAA needs to reduce costs by 5.2% and increase revenue by the same amount to record a R1bn improvement by the end of the current financial year.
Although the report did not mention anyone by name, it slated the previous board, led by former chairperson Dudu Myeni, for leaving SAA with rampant corruption, low pilot productivity, a significantly weak balance sheet, liquidity problems, loss of confidence from suppliers, a lack of critical skills and fragmented IT systems.
“Unfortunately, SAA has had acting people in most senior positions. The board was also fractured and there was a lot of instability. The problem here is not even the market, but within, with people stealing and committing fraud,” another executive said.
“But SAA is absolutely fixable and Jarana is moving things in the right direction.”
Although no decision has been made to sell some of SAA’s business units, the report shows that the matter was discussed at the board meeting. Jarana, who has led SAA for almost a year, asked board members whether the SAA Group needed all the businesses “given the relative sizes and impact on financials”.
A senior SAA official said: “We continue to review our portfolio and we continue to engage with the shareholder. There is no holy cow and everything is under consideration. There is no pressure to sell anything, but does SAA really need Air Chefs?
“We are not in the business of selling food and it is not our core business. We just need ready-made food at the cheapest cost available, without having to worry about management and staffing issues.”
Regarding SAA Cargo, the document said while the division generated more than R2.1bn last year and made a R387m profit, it had major problems – including antiquated warehousing facilities, rigid pricing models and extensive dependency on aircraft that ferry passengers and cargo at the same time.
Jarana asked the board to consider a full cargo division or to outsource the business completely.
The document shows that Jarana is inclined towards outsourcing the cargo division to a private third party.
Banks won't finance SAA
A senior SAA executive said government will have to continue funding the airline until 2021, when its balance sheet becomes self-sustainable.
“Banks have walked away from us despite our guarantees from Treasury. It is true that they don’t want to fund us. They will only fund us once they see a path to debt reduction,” he said.
“If you are a shareholder of a company and you are unable to source funds from banks, what do you do? You have to step in and rescue the situation, to the extent that you believe the turnaround strategy is worth the paper it is written on.”
The report shows that the airline will need R21.7bn between now and 2021, when it is expected to return to profitability. The R21.7bn is made up of government bailouts amounting to R12.5bn, and loans of R9.2bn.
In addition, it shows that in the current financial year, Jarana’s executive management is projecting a 5.2% loss which, according to projections, will be reduced to 1.9% in the 2019/20 fiscal year before returning to profitability, with a projected 1% profit, in 2021.
In September last year, City Press reported that Nedbank told a meeting – attended by Treasury’s director-general, Dondo Mogajane, and SAA’s former chief financial officer, Phumeza Nhantsi – that the bank would not lend money to SAA as long as Myeni was still on the board.
Nedbank was not the first bank to withdraw support for SAA. In July last year, Standard Chartered revoked its R2.207bn loan, and a month later, Citibank pulled the plug on a R1.8bn loan.
However, another SAA executive said Treasury and the department of public enterprises were in discussion with the banks to try to convince them to change their minds not only regarding the funding of SAA, but of other state-owned entities as well.
“But when it comes to SAA, a funding plan must be created. You cannot just rely on debt for such a big company. The problem with SAA is that it doesn’t sell as a brand. A brand must sell.”
The document shows that Jarana’s corporate plan was beginning to bear fruit. The plan, approved early this year, has as its focus revenue stimulation, flight schedule reorientation, organisational design, supply chain transformation and the overhauling of Saat’s logistics and operations. The report shows that during the first quarter of this year, SAA’s revenue improved.
Jarana refused to comment about the plan. However, another official said this had been brought about by the realisation of a “dramatic shift to low-cost airlines, and the executive management decided to shift four aircraft from SAA to Mango”.
In April, SAA also reduced the number of flights to London’s Heathrow from two each day to one. SAA also introduced new aircraft on this route which caused SAA to post a profit on the route for the first time in more than a decade.
A revamp of the airline’s flight schedule will involve rescheduling flights to Germany, Hong Kong, Perth and Buenos Aires to improve connectivity for passengers, capture more traffic and extract more flying hours on each aircraft, the document shows.
SAA, another executive said, was also looking at establishing new routes from West Africa to the US and London, and from Johannesburg to the Asia-Pacific region.
“We need to grow and we want to use the same aircraft to fly more,” he said. We are focusing on route profitability. The plan is to grow and become a commercially viable airline. The corporate plan has identified a number of risks and mitigation strategies.”
He blamed government for SAA’s woes, saying: “Airlines need stability. Most of the chief executives of most of the big airlines have been there for more than a decade. The mind of the shareholder is reflected on the board.”
SAA spokesperson Tlali Tlali said the airline was unable to comment because it had not seen
the strategy document. “We will soon address the media on the progress we have made, milestones, and the path that lies ahead in transforming SAA ... We are confident that the airline is moving in the right trajectory and we are making steady progress.”
The US has not granted South Africa an exemption on its increased steel and aluminium tariffs, this after the department of trade and industry (DTI) made representations to the US government.
The DTI issued a statement expressing its disappointment on the matter on Monday, following a teleconference between Trade and Industry Minister Rob Davies and US Ambassador CJ Mahoney.
US President Donald Trump however signed proclamations granting a select number of countries exemptions until June 1, Bloomberg reported. These countries include the European Union, Mexico, South Korea, Australia, Argentina, Brazil and Canada.
The US is imposing a 10% ad valorem tariff on imports for aluminium products and 25% ad valorem tariff on imports for steel.
Davies had made two written submissions to the US and the SA Ambassador to the US Mninwa Mahlangu also engaged with the White House National Security Council Staff, State Department, the Office of the US Trade Representative and Commerce Department on the matter. Davies also had teleconferences with Mahoney and other US trade officials on March 22 and again on April 30 – when SA learnt its fate.
Similarly SA’s steel exports in 2017 only accounted for 0.98% of total US steel imports. However the exports represent 5% of SA’s production and this equates to 7 500 jobs in the steel supply chain, the department said. “SA will be disproportionately affected both in terms of jobs and productive capacity,” the department reiterated in its arguments to the US government.
The department also argued that SA is also grappling with the steel glut and has control measures in place to avoid transshipment of steel from third countries.
SA also offered to restrict its exports to a quota based on the 2017 exports level, but this was not enough to convince the US.
The department also pointed out that some of the exempted countries are the “biggest” exporters of steel and aluminium to the US.
According to the department the exempted countries accounted for 58% of steel imports and 49% of aluminium imports to the US in 2017.
“South Africa is therefore not a cause of any national security concerns in the US nor a threat to US industry interests and is not the cause of the global steel glut.
“Instead, South Africa finds itself as collateral damage in the trade war of key global economies. South Africa is concerned by the unfairness of the measures and that it is one of the countries that are singled out as a contributor to US national security concerns when its exports of aluminium and steel products are not that significant,” the DTI said.
The department raised concerns about the impact this decision will have on the competitiveness of SA steel and aluminium products in the US. The department believes it is likely to displace SA products out of the US market in favour of the exempted countries.
“South Africa is also concerned that the measures are implemented in a way that contravenes some of the key WTO (World Trade Organisation) principles.”
The department said it remains open to engage with US authorities to find a “mutually acceptable” outcome and encouraged domestic exporters to continue to engage with US buyers.
The poor are carrying the burden of State Capture through the VAT increase, a Parliamentary committee has heard.
This is just one of the criticisms raised by several organisations and industry representatives before Parliament’s Standing Committee on Finance at a hearing on the VAT panel report on Wednesday.
The report, published in August, is the work of an independent panel that reviewed the current list of items exempted from VAT and proposed new items to be zero-rated. The panel was constituted after then Finance Minister Malusi Gigaba announced in February that the VAT rate was to increase by one percentage point from 14% to 15% to raise an additional R22.9bn.
1. The poor are paying for State Capture
Neil Coleman, who represented the Institute for Economic Justice, said that SA has to try to find ways to plug revenue shortfalls as tax collection has lagged. This problem has further been exacerbated by State Capture, which has reduced revenue to the fiscus.
“It should not result in punishment of the poor. We had nothing to do with that failure,” he said. The SA Revenue Service has experienced two successive years of tax shortfalls: R30bn in 2016/17 and R49bn in 2017/2018.
Similarly, trade union federation Cosatu believes the one percentage point VAT hike punishes the poor for the “sins of the rich”. The federation insisted that government has other options to address revenue shortfalls. It wants the state to “stamp out corruption” and set out how it will recover stolen funds.
2. Unlikely VAT hike will be rescinded during the mini-budget
The Budget Justice Coalition was among the organisations calling for the VAT hike to be rescinded. But committee chair Yunus Carrim pointed out that the mini budget, set to be delivered on October 24, has already been set and it is unlikely that any decisions would be implemented then.
Cosatu proposed that government purchase and distribute sanitary pads to clinics, hospitals, no-fees schools and tertiary institutions.
“Government has done it with feeding schemes and condoms. Girls should not be disadvantaged because of a normal cycle of life,” said Cosatu’s Parliamentary coordinator Matthew Parks.
The Budget Justice Coalition also proposed that government invest in providing sanitary products to poor women and girls – as this will ensure that they will directly benefit from the zero-VAT status, while richer households can continue to buy the sanitary pads. Sanitary pads were one of the items that the VAT panel proposed be zero-rated.
4. More protein needed on the zero-VAT list
The Budget Justice Coalition, which represents several other organisations, raised concerns over the lack of protein on the zero-VAT list, a concern as malnutrition and protein deficiency leads to stunting and anemia. It suggested peanut butter and soya mince be included on the list.
The South African Poultry Association pointed out that chicken accounts for 13% of food expenditure for lower-income households, and supported the inclusion of whole fresh or frozen chicken products and portions.
5. VAT hike simply unaffordable for the poor
The Pietermaritzburg Economic Justice and Dignity Group collected data on the impact of the VAT hike by tracking a basket of 38 foods, 20 of which are subject to 15% VAT, the committee heard.
In August 2018, the total cost of the basket was R3 009. Foods subject to VAT accounted for 55% of the basket - or R1 654. The VAT on the foods amounted to R215, or 7.2% of the entire basket, said the group's Mervyn Abrahams. This equal to the price of a 35kg of maize meal which poor and working-class households buy each month.
Taking into account the recommendations of the VAT panel, the savings on the food basket for August 2018 would equal R40.81, bringing the total cost of the basket to R2 968. Abrahams said this was roughly equivalent to the median wage of a black South African worker, which is R3 000.
“That is just food alone - therein lies the problem,” he said. SA households are not getting sufficient income, and that the problem is not just simply a question of zero-rated items, he said.
6. Food choices must be expanded
Geoff Penny of the Baking Association of South Africa weighed in on making white bread zero-rated. He said this decision would enable poor consumers to choose the product they prefer.
Poor consumers should be given the opportunity to shop with dignity, the baking association’s submission read.
Similarly, Dr Ziyanda Majokweni of the Broiler Organisation argued that whole chickens should not be subject to VAT - as opposed to just having portions like chicken feet and gizzards zero-rated. This would give consumers more choice, she told the committee.
7. Double take on current list
Lionel Adendorf of FairPlay criticised the fact that the current list 19 zero-rated items was not reviewed. If there were a thorough review of the list the panel would have taken some items off the list, and would have included new household items which are being used by these poorer households, he argued.
The PwC’s VAT Partner Lesley O’Conell also echoed views that the current list should be reconsidered to include ones that are consumed by the poor.
The committee's chairperson Yunus Carrim called for Treasury to interrogate the submissions more seriously than they had previously.
South Africa’s Upper House of Parliament, the National Council of Provinces (NCP), on Tuesday approved the controversial National Minimum Wage (NMW) Bill which will be sent to President Cyril Ramaphosa for assent.
The Parliament said the NCP approved the bill without amendment.
The bill, which Minister of Labour Mildred Oliphant introduced in November 2017, aims to provide for a NMW and the establishment of a commission with clear functions and composition for implementation, Parliament spokesperson Moloto Mothapo said.
The National Assembly (Lower House of Parliament) had earlier approved the bill and referred it to the NCP. Once signed by Ramaphosa, the bill will become law.
The bill sets 3,500 rand (about 243 U.S. dollars) per month or 20 rand (about 1.4 dollars) per hour for over six million working people in the country.
Trade unions have lambasted the NMW as “slavery wage,” saying the working class cannot make both ends meet with the meagre NMW.
In May, massive protests against the bill took place across the country.
Trade unions have threatened to stage more protests if the NMW wage is not raised to a living wage.
The government says setting the NMW was informed by research and robust analysis of various scenarios and their possible ramifications, not by some idealistic desires.
All social partners have worked hard for nearly three years to reach agreement on the NMW to improve the conditions of millions of poor families, according to the government.
Ramaphosa has pledged to increase the NMW over time in a way that meaningfully reduces poverty and inequality.
South Africa’s trade surplus widened more than expected to 12 billion rand ($915 million) as exports in precious, base metal and vehicle parts jumped, easing pressure on the economy and lifting the currency.
The South African Revenue Service said in Johannesburg that exports rose by 7.1 per cent on a month-on-month basis to 110 billion rand in June, while imports dipped 0.9 per cent to 98 billion rand.
Commodities led the rise in exports with sales of precious metals up 38 per cent and base metals rising 13 per cent in the month. Sales of vehicles equipment also went up 8 per cent.
Analysts said the large surplus was a sign the current account was narrowing, which would lessen the impact of any reversal of portfolio flows.
“This is the fourth month in row of surpluses so it will definitely reduce the current account deficit in the second quarter,” said senior economist at Nedbank Isaac Matshego.
“But remember, the current account is structural so we really do need those portfolio flows to keep coming in,” Matshego added.
The rand responded to the news of the widening surplus by rising slightly on the data, trading at $1 =13.1350 at 1300 GMT, about 0.2 per cent firmer.
The rand has rallied in the past month to become one of the top performing emerging market currencies, due mainly to positive turn in sentiment, but analysts warn it remains at risk to offshore events, particularly the ongoing trade tiff between the United States and China.
Africa’s most industrialised country ran a large current account deficit of 4.8 per cent of GDP in the first quarter.
A small business incubation programme that is supported by by Rand Merchant Investment Holdings is looking for entrepreneurs who aim to disrupt financial services.
A total of 16 businesses will be selected to pitch for eight places on the AlphaCode Incubate programme of twelve months. The eight businesses will each get R1 million in grant funding as well as R1 million worth of support including mentorship, exclusive office space in Sandton, marketing, legal and other business support services as well as access to RMI’s networks.
The businesses must be no older than two years and must be 51% black owned and managed.
The competition is open to businesses across the financial spectrum including payments, insurance, savings and investments, advisory, data analytics and blockchain.
"We want to help take courageous entrepreneurs with seriously disruptive financial services business models to the next level," says AlphaCode head, Dominique Collett.
In partnership with Bank of America Merrill Lynch South Africa and Royal Bafokeng Holdings, AlphaCode Incubate has disbursed R13 million to 15 black-owned businesses over the last three years
Entries can be done on the competition website. The first round of applications closes on August 31.
South Africa invests eight times more in China than the other way around.
The $14.7 billion (R193 billion) in Chinese investments – which include loans to Transnet and Eskom – announced during Chinese President Xi Jinping’s state visit to South Africa this week, are dwarfed by South Africa’s investment in that country, which stood at just over $80 billion in 2016, according to a recent report compiled by Deloitte for the Department of Trade and Industry.
At that same time, China’s investment in South Africa was $10 billion.
Trade and industry minister Rob Davies pointed out this discrepancy this week during this Brics summit in Johannesburg, when he was asked whether the new Chinese investments would not “overcrowd” the South African market.
“We are in the situation where we welcome more,” Davies said. “Of course when they do invest we indicate that we are looking for productive activity and that we are looking for them to increase the value addition.” He also called for investment-led trade.
Naspers alone owns a $175 billion stake in Chinese internet start-up Tencent, while China’s major investment in South Africa is the recently-opened $840 million (R11 billion) BAIC vehicle plant in the Coega Industrial Development Zone
China is the most significant investor in South Africa out of the Brics countries, and its investments created on average 301 jobs per project. India was the second largest investor, with $61.2 million and an average of 135 jobs per project.
Between 2003 and 2017, Brics countries officially invested a total of $17.8 billion in 189 projects in South Africa, creating 36 852 jobs. In the last two years, however, the number of projects from these investments dropped to the levels it was at in the early 2000s.
South Africa held $82 billion in foreign investments in Brics in 2016, while Brics countries only held $11 billion in foreign investments in South Africa.
Investments from South Africa into Brics countries surged since South Africa became a Brics member in 2010.
South African investment in Brics countries as a whole grew from a net negative position of $261 million in 2001 to a net positive position of $71 billion fifteen years later.
This could be attributed to, amongst others, “an increased foreign expansion by South African firms and a considerable relaxation of exchange controls by monetary authorities in 2011 that allowed South African companies to invest much larger sums abroad,” according to the Deloitte report.