Corruption continues to loom large over South Africa – it dwarfs the price of gold, the effect tax hikes has on the economy and stymies mass job creation. This situation will drive many investors to consider international options as a priority in 2019, says the head of Africa for financial advisory firm, deVere Acuma,
According to Gavin Smith, international investment is a key way to help investors to “safeguard their money, mitigate risk, and capitalise on opportunities in light of the current economic situation in South Africa”.
Smith said that while the politicians attempt to clean up the mess of large-scale graft at State Owned Enterprises, ordinary South Africans are battling fuel, tax and interest rate increases. “This has not only affected investor confidence, but also had a damaging effect on any expected investment returns over the past year,” Smith said.
The VAT hike earlier this year, which saw the VAT rate increase from 14% to 15%, also had a severe impact on the pockets of all South Africans.
“The increase, necessary to combat a revenue shortfall, was not an easy political decision to make and came at the detriment of economic growth, despite renewed confidence in President Cyril Ramaphosa and a recovery in the price of commodities,” he said.
Smith explained that what made the VAT increase harder to swallow was that it came along with other tax hikes, including higher estate and luxury goods duties as well as fuel levies and increases.
“Persistent fuel increases have played a significant role in adding to the predicament of cash strapped consumers. In fact, rising fuel costs have had an impact on almost every aspect of the supply chain, which together with tax increases have had a significantly negative effect on the economy,” he said.
He added that the corruption allowed to fester at Eskom has recently also seen mass load shedding across South Africa as the power utility cannot provide a consistent source of energy. “This will undoubtedly have a negative effect on both the economy and on investors,” Smith said.
Smith said that Finance Minister Tito Mboweni’s medium term policy reflected a downward trend of economic growth and rising unemployment figures, which could point to further credit ratings downgrades during the course of 2019.
The downgrade that took place earlier this year, said Smith, created “uncertainty in the market, which inevitably leads to volatility.” Of the many adverse economic effects a downgrade can cause, he maintains that it is also linked to an increase in the cost of credit, “which in turn relates to currency devaluation, rising interest rates and inflation.”
Economic recovery in the New Year will “depend heavily on private investment and public private partnerships,” said Smith.
He pointed out, however, that not all predictions for 2019 are as positive.
“Policy failure, lack of economic growth and political distractions that plagued 2018 could well be the foundation for another dismal year, with expectations of a plummeting rand/dollar exchange,” said Smith.
The push for land reform and particularly land expropriation without compensation could have dire economic consequences.
While investors may agree that land reform is necessary to address inequality in the country, there are concerns that expropriation without compensation could undermine property rights, collapse local banks and further discourage foreign investment. There is little doubt that this issue is a key factor impacting market uncertainty.
Smith said that going forward, addressing and combatting corruption is pivotal to any economic upliftment that can take place going forward.
“Corruption dwarfs the price of gold and has far reaching effects on economy. Moreover, the world is watching to see how much of a rear-guard action Zuma and his allies will be able to perform. As such, the country waits with bated breath for the 2019 general elections for more clarity in terms of what the New Year will bring,” he said.
Smith said it is important that investors ensure that they take the appropriate measures to guard their wealth over the short, medium, and long-term.
“Instead of simply trying to chase the markets, investors need to place their value in adequately diversifying their portfolios to preserve and build their wealth,” he said.
“A key way to do this, as history shows us, is to explore the many bona fide, established international opportunities that are available.”