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South Africa balancing on the edge - corporate SA share their views for 2016

18 January 2016

South Africa will narrowly escape a technical recession with economic growth of 1.5%1 expected for the year 2015. With a marginal rise in GDP growth predicted for 2016 (to 1.7%2), business leaders share their concerns over continued regressive growth in the economy – and their views on what’s required to turn things around.

Compacting global macroeconomic influences

According to Trevor Hoole, CEO of KPMG in South Africa: “Harrowingly, this will be the second concurrent year that the country has faced rigorous market downgrading, underperformed productivity and skated through on lower than expected economic growth. Overall, 2015 has been a tough year, where we have seen lower macroeconomic numbers globally – and particularly in developing economies.”

Even fellow BRIC countries are feeling the pinch; where the slowdown in China’s economic growth is well known, however, added to this both Brazil and Russia are in negative territory and expected to experience below 0%1 economic growth for 2015 and 2016.

“Simply put; it’s a tough market with more developing countries competing for less available revenue to support their growth,” says Hoole. “However, South Africa has the added challenge of trying to stay investor confidence. Lower economic growth, coupled with volatility in power supply, labour instability and, the perception of lack of leadership; South African CEOs as well as foreign investors are less optimistic about the prospects of doing business in South Africa – which continues to impede investments into the country. Added to this, the Finance Ministry debacle in December has done little to instil confidence in our country’s leadership. Poor financial performance and weak corporate governance at State-owned enterprises also adds fuel to the fire.”

Adam Orlin, CEO of Blue Strata, agrees and adds that South Africa’s downgrading and the adverse impact on debt ratings and financing costs continue to cause significant concerns for business especially from an import perspective. “This is also having a negative impact on the country’s ability to drive industrial growth. Therefore, the downgrade require a critical response aimed at stabilising the business environment in terms of labour, currency and the ability to provide jobs and that, ultimately, will lead to a stabilisation of the Rand – all of which is critical to domestic and foreign direct investment and industrial growth in the country."

SA feeling the squeeze of negative tax revenue

Slower business growth and outputs has had a resulting impact on tax revenue collection, where in the 2015 mid-term budget policy statement (MTBPS) Finance Minister Nene announced a revised R7,6 billion downgrading in tax revenues for the year.

The newly appointed President of the Johannesburg Chamber of Commerce and Industry (JCCI), Ernest Mahlaule, says: “While Treasury has confirmed that additional taxes will be needed to increase available revenue for Governments investment projects, the verdict is still out on what form these increases will take. However, it is our considered view that any increase in corporate tax in 2016 would be counter-intuitive.”

The revenue numbers to date already demonstrate a negative growth in corporate income taxes for the year, as currently the collection rate is lower than the R179.5bn collected in 2014, which is poised to shave a significant amount from the revenue potential.

“The reality is that due to low productivity levels, interrupted electricity supply seen during the better part of 2015 as well as the exchange rate that remains under pressure, profitability remains an important challenge and as a result businesses in South Africa are strained to stay afloat. Therefore an increase of taxes on companies could sway the balance and we may see more companies – particularly small and medium-sized enterprises (SMEs) – closing their doors, which will have a deteriorating influence on employment and future growth in the country.

However, corporate income tax revenue isn’t the only source of tax revenue in the red; Blue Strata’s Orlin admits that the weaker Rand is having a significant impact on import taxes. “Given that the Rand fell to a new 13 year-low against the U.S Dollar earlier this year and hasn’t recovered, this continues to place pressure on importers and it’s not surprising that there will be negative revenue growth in import related taxes for 2015.”

“South Africa is increasingly dependent on imported goods and even when products are manufactured locally, they often use imported components,” adds Orlin. “With this, importers are also seldom able to pass on price increases immediately to their customers and with industrial action in different sectors, high operational costs – with tariff increases on power and water – margins are being affected. As a direct result, businesses are feeling the pinch and looking to tighten their operational costs and risks and we are likely to see this being the case during 2016.”

There are certainly a number of persisting factors and constraints that are preventing the country from reaching its industrial growth targets, however, this is an endeavour that Government must keep with. It is only through continued re-investment where Government will achieve its objectives in revitalising, re-energising and re-industrialising the economy – which are all paramount to future growth.

Re-industrialisation should define new and cross-border growth opportunities

“While demand is low from many of the country’s overseas trading partners, it presents an ideal opportunity for Government to review some of the country’s regional trade policies and intra-Africa investment strategies. The same can be said for businesses operating in South Africa,” says Brendan Horan, MD at MiX Telematics (Africa).

As profit margins of businesses operating in South Africa continue to feel pressed, ever growing numbers off forward-thinking businesses look beyond the country’s borders to increase their business prospects. “While expanding into Africa isn’t a new strategy, the rapid pace with which businesses are expanding into Africa today is both daunting and exciting,” adds Horan. “I believe we need to break away from traditional thinking that to stimulate growth in South Africa, the industrial activity needs to happen within the country. For any South African business that doesn’t want to miss the opportunity to monopolise on Africa’s growth, it has become imperative to have a cross-border or intra-Africa investment strategy in place.”

To achieve this though, both Government and business have interconnected and interdependent roles to play in stimulating growth to the benefit of the South African economy. “There needs to be an alignment of Government and business objects, underpinned by an establishment of sustainable public private partnerships that are not characterised by the prevailing trust deficit between the two key partners, to tackle challenges that are impeding continued and sustainable growth in the country. It’s about working together to put the boom back in business in the country for 2016 and beyond,” concludes Mahlaule.

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