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Economic snapshot and what it means for your business

Article provided by Investec Business Cash Solutions

Investec Cash Investments recently held its bi-annual Business Matters event. This is a series of events exclusive to Investec Cash Investments clients which aims to provide access to current, innovative thought leadership as well as the chance for attendees to be in touch with like-minded peers.

This year’s line-up included an economic update from Mike Schüssler, insights into technology from David Duarte and tips on closing the gap in digital transformation from Mike Perk.

Good news for business

To begin, economist Mike Schüssler, looked at the impact of the current Ramaphoria sweeping South Africa and the recent 2018 budget on business. His take was that business confidence in South Africa has been lacking and it is stopping businesses, whose cash flow is relatively good, from investing. Schüssler expressed hope that the new political momentum in South Africa would encourage businesses to start to invest again.

Looking at the old adage: “Turnover is vanity, returns are sanity and cash flow is reality”, Schüssler believes South African business “is not doing too badly” and summed this up as follows:

  1. There has been real growth in turnover, above inflation.
  2. Cash flow is very positive, even after inflation, coming in at around three percent for income after expenditure
  3. The problem comes in with the ability to invest. “Businesses are not closing down right now, they’re just not investing right now.”

Corporate tax

While many consumers were angered by the fact that the 2018 budget left corporate tax unchanged, Schüssler believes that hiking the rate would’ve further stifled business growth. He noted that “South Africa has the fifth highest company income tax to GDP ratio in the world, at 5.4% – way above the global average of 2.8%”. In terms of total tax to GDP, the world average is 15% and South Africa is at 27.3%.

Growth forecast not enough

While the outlook for GDP growth is looking much more positive on the back of the “Ramaphosa Rally”, Schüssler says 1.3% is not nearly enough to turn South Africa around.  “We still haven’t grown for three or four years above the rate of our population growth. And that’s the real problem – that pressure that we’re not getting richer as a society.” Schüssler explained that when your population is growing at 1.7 percent annually, you need to grow GDP by at least three percent.

Fostering entrepreneurship means being pro-business

South Africa’s ratio of entrepreneurs is low compared to the rest of Africa and other developed countries worldwide. “If we look at our total adult population, only one out of every 44 people is an employer and one out of every 25 is self-employed.” Schüssler believes that we need to focus on creating the conditions in which employers and entrepreneurs feel more comfortable, as well as encouraged to make profits.

Quick wins

When asked how government could get some quick wins to stimulate the economy, Schüssler pointed to three areas:

  1. State-Owned Enterprises (SOEs)
    SOEs make up at least seven percent of our economy. “If we get professional boards and management at SOEs and stop the corruption we can make a huge difference”.
  1. Government departments
    “Government makes up more than 30 percent of our economy, so we need to make it more efficient”.
  1. Home ownership
    Schüssler suggests government give people in RDP houses ownership of those properties, while asking farmers to do the same for their farmworkers. “That way we can create a base for people who don’t have any assets to build from”.

Not all doom and gloom

Schüssler ended off with highlighting some of the very positive aspects that South African businesses can focus on, namely:

  • Despite the increase in VAT, inflation should average below 6%.
  • The South African consumer is lowering their debt burden and increasing their asset base.
  • World growth is the best in years

In short, South African business is doing alright but more confidence and real positive action would ignite a barrage of investment.

Investec Business Cash Solutions is a proud partner of the NSBC.