Exchange control regulation changes and slowly making money transfers to and from South Africa easier.

The Financial Surveillance Department of the SA Reserve Bank announced today that SA resident individuals may use their single discretionary allowance (R1m per calendar year) for foreign investment purposes without having to obtain a tax clearance certificate.

Previously, the single discretionary allowance (applicable to SA residents over the age of 18), covered the following:

a) Donations to missionaries
b) Maintenance transfers
c) Monetary gifts and loans
d) Travel allowance
e) Study allowance
f) Alimony and child support payments
g) Wedding expenses and other special occasions

Foreign investments could only be undertaken within the annual limit of R4m, and one of the requirements included the presentation of a tax clearance certificate.

The position has now been broadened and foreign investments are included in the list of transactions under the single discretionary allowance without the need for a tax clearance certificate however, a form MP1423 would still need to be completed and signed.

It follows that the requirements for the transfer of the annual foreign investment allowance of R4m remain the same.

The circular was issued today, 23 December 2011 and is therefore effective immediately.

The discontinuation of the 5c denomination is to be welcomed because the denomination is useless in every-day purchase transactions. Nothing in the South African retail sector costs 5c and the only role of the coin is as a rounding unit in providing small change to consumers. Since the commencement of a democratic government in the early 1990s, South Africa has abandoned the 1c and 2c denominations and for consumers there is no sound reason to continue with the 5c piece either.

For a long time, South African retailers were able to charge prices ending in 99c. Since the abandonment of the 1c and 2c pieces, the trend has become to end prices in 95c. The effect of this pricing strategy is that consumers are usually left with many 5c pieces that cannot easily be used to pay for anything and which banks may be loathe to exchange for larger denominations because it is laborious to count out so many individual coins. Retailers also do not generally appreciate having a pile of the coins dumped on the counter at the till (yet they do not object to handing them out as small change). It would not even be appropriate to give 5c to a beggar. The coin therefore no longer serves any worthwhile purpose for consumers or the public. Its only significance is its strategic value to retailers in determining their prices and as such its discontinuation is a good move.

Both sides of the South African 5c piece, which will no longer be minted.

The only other advantage of the 5c coin that I have heard of is in engineering workshops where, if the coin is neatly drilled through the centre, one is left with a useful metal washer of an appropriate size. But this practice is illegal, since it involves the defacement of state property, and it is not recommended by the administrators of this site. For those technicians who are not concerned about the illegality of the improvised washer, there is also the question as to whether the metal of the coin is as reliable as the purpose-made washers which should rather be used.

Further to this, the 10 cent denomination coin is to be replaced with a new 10 cent denomination coin with effect from April next year. One wonders, however, how long it is going to be before the 10c piece becomes equally useless to consumers and for the reasons described above it is also abandoned.

According to government spokesman Jimmy Manyi, “The new proposed 10 cent denomination coin will remain the same size. The metal content will change from the previous bronze-plated steel to copper-plated steel. This will result in the reduction in cost of producing these coins.”

Source: allafrica.com

An example is the solar power industry. Solar panels are still not common in South Africa and due to their considerable cost (about ZAR20 000) they remain the preserve of the upper economic class. Manufacturing of the panels is therefore aimed at a relatively small target market, making the panels expensive and the cost per panel higher than it would be in a situation of mass production. China, on the other hand, exports solar panels to South Africa at a much lower price than the South Africa panels. The economy of scale means that China, which is servicing a much bigger panel market, can easily out-price South African panel builders.

This makes business harder for South African suppliers. They may face dwindling revenue or even closure. Jobs are lost and skills are wasted, because even if retrenched workers do not leave the country to find work elsewhere, they are not applying the skills that they have been equipped with, so that the skills base of the economy is under-utilized. Sometimes it isn’t necessary to train more people in a certain skill – it is possible to make use of those who already have that skill who are unemployed.

In order to counter the threat posed by cheaper Chinese imports, there are two possible strategies on the part of government but neither of them is advisable.

The first is to subsidize the local industry. This is done in the European Union, for example, where farmers are subsidized by the state. This makes their products more financially attractive to their export markets. However, there is a problem with this approach. If subsidies are applied, they can only be funded through taxpayers’ money, which means that many people who do not use solar panels or even want to use them will be assisting those who do. Since solar panels are a lifestyle choice and not a necessity, this is hardly fair and is probably going to evoke criticism. In fact, South Africa’s para-statal electricity company, Eskom, did have a system of subsidizing solar panels in the past but the system was accused of abuse by suppliers, since the subsidy did little or nothing to reduce the total price of the panel and its installation. The subsidy also did not lead to widespread installation of solar panels. Another problem with subsidies is that in some cases, if the administration of the subsidy is lackadaisical, the money may actually be used to subsidize imported products where they are being marketed indirectly by an unscrupulous local wholesaler or retailer.

The second option is to introduce import tariffs. What this does is to secure the market price of the tariffed product, because imported versions (on which the tariff is charged) cannot be sold more cheaply than locally produced ones. Once again, however, this is likely to be unpopular with the public. People prefer to pay less for the same thing. Import tariffs deny them the opportunity to do that. The situation in South Africa is already controversial because of a product like beef, which is subject to import tariffs. If imported South American beef was not subject to that tariff, it would cost about half of what South African beef costs and South African beef farmers would probably go out of business in a very short space of time (South America has about ten times as many head of cattle as South Africa does). The upshot is that people in South African are paying twice as much for their beef as they could be, which is obviously going to cause opposition and is also strange in a country that suffers the levels of poverty that South Africa does. Given the potentially sensitive nature of the issue of import tariffs, it is therefore unlikely that any government would lightly introduce such a measure because thousands of votes may be lost in the next election and foreign investors may also be discouraged from entering the country. China is South Africa’s biggest trading partner and it is unlikely that the South African government would risk antagonizing China by implementing import tariffs of Chinese goods.

Then there is also the peculiar situation in which a rebate was being paid to consumers who installed solar panels. For some reason, the rebate was also being paid in cases where a foreign-manufactured panel was installed. What this caused in practice was a situation in which taxpayers’ money was being used to encourage the installation of the foreign-produced products. In other words, the South African taxpayer was rewarding South African consumers for supporting the foreign manufacturer. The rebate policy is therefore also open to that kind of illogical and counter-productive application if it is carelessly applied and it seems that such policies, whether they be import tariffs, subsidies or rebates, are not the solution to maintaining local industries where the product is limited to a small proportion of the population and is non-essential.

Essential products, on the other hand, such as maize and petrol, are a different issue, and the points raised in this article do not apply to them in equal measure or at all.

At present, China is South Africa’s largest trading partner. Mainly raw materials are exported to China, and South Africa imports manufactured goods in return. Chinese businesses have also taken an interest in South Africa, as part of the trend of Chinese investment in the African continent.

The advantage of Chinese investment is commonly held to be that Chinese money is alleviating problems remaining from Western colonial rule, such as under-developed infrastructure or unstimulated local economies. Politically and psychologically, many people in Africa may also be averse to Western investment, whereas China has no colonial track record in Africa and may therefore be seen as a benign trading partner or even an acceptable benefactor.

However, in practice the investment has had other consequences. The main one is the influx of cheap Chinese manufactured goods. Africa isn’t the only place to be experiencing this influx, but in Africa its consequences is even more serious because the base of industrialisation with which to counter the influx is much lower than in developed, heavily industrialised nations. Impoverished African countries may also be unable to raise subsidies to defend their local industries and may not want to antagonise positive Chinese investment sentiment by instituting import tariffs on Chinese goods.

The effects of this unbalanced price situation are not good. Local suppliers are being shoved out of the market because they are simply unable to compete cost-wise with the Chinese products. China is an international manufacturing suppliers servicing many markets outside of its own borders and therefore is able to sustain mass production. South Africa however, as an example, has a population of only about 50 million people (Beijing alone has about 30 million), and many people in South Africa are not large-scale consumers because they are indigent. This makes the bulk of South Africa’s consumer base without much spending power, and does not tend to encourage the mass production of many things.

An example is the textile industry. Cheap Chinese clothing has become a byword in jokes about fashion but the reality is more grim for textile workers. Textile workers are among the lowest paid employees in South Africa, and yet they are still being paid more in dollar terms than their Chinese counterparts. This makes local South African textile factories unable to compete with Chinese imports. The alternative, which is for Chinese businesses to open up operations in South Africa, has been marred by controversy because South Africa has a system of minimum wages which Chinese proprietors may not always be enthusiastic about enforcing in their factories. Shrinking revenue means that local factories are forced to lay off staff or shut down.

It is extremely difficult for any country to make their local industries competitive when the cost of labor in China is so low. Jokes about the quality of Chinese goods are also something of a tradition, but that quality isn’t really all that low and if local consumers are prepared to accept goods of Chinese origin then the price is what becomes of paramount importance.

Besides being under heavy domestic demand, coal is also exported. Export volumes are hampered by domestic rail issues and port capacity, but exports of coal are enormous and coal is third only to platinum and gold as an export commodity earner. Although power generation using coal produces huge volumes of atmospheric pollution and therefore has a bad reputation, nuclear power has recently become less popular after the Fukushima disaster and has traditionally attracted immense opposition. While alternative energy generation forms such as solar power, wind farms and wave turbines remain peripheral in terms of national electricity supply, coal is probably going to be the main source of industrial and domestic energy in many countries and South Africa’s revenue from it should be secure for many years yet.

Of course, coal is a fossil fuel and is therefore a finite resource. One prominent socio-economic commentator, Moeletsi Mbeki, the brother of former State President Thabo Mbeki, recently described South Africa’s economic reliance on its mineral wealth as “unsustainable”. He may have a point, and the long term management of mineral resources remains vexed by calls for nationalization of the mines and deficiencies in supporting infrastructure (particularly electricity supply, but also rail transport). Labor issues also obstruct the operation of the mines from time to time. It should be a priority for people in South Africa to shape and maintain a properly functioning system of harvesting and processing the country’s minerals so that future generations may also benefit from the immense mineral riches of the country. And if those minerals are not a sustainable economic model then they should at least pay for the development of one, such as more specialized industrialization in other sectors or a higher level and quality of education, as well as deeper investment in small and medium businesses.

South Africa is home to about 70% of international chrome reserves, and produces about three quarters of all ferrochrome. As an example of the sheer magnitude of South Africa’s chrome reserves, the sceond largest ferrochrome producer in the world, which is situated in South Africa, has proprietary rights to a more than 200-year reserve (estimated at current rate of extraction). In 2009, South Africa produced roughly 9.5 million tons of chromium ore. The contribution of a single mined metal to the national GDP of South Africa depends on the production levels of that metal and also on the ZAR-USD exchange rate, since the metals are traded internationally, but mining and mining beneficiation account for roughly half of the country’s exports and as the main supplier of chrome and ferrochrome in the world South Africa derives substantial revenue from the metal.

The price of ferrochrome is not uniform because it depends on the percentage of chrome in the alloy. However, chrome is not a precious metal and it does not cost anywhere near as much as metals like gold or platinum. An imperial pound (lb) of ferrochrome containing about 50% chrome costs around USD10. Chrome and ferrochrome are also usually raw materials for other products, unlike precious metals.

The value of the South African chrome and ferrochrome mining and production industry is that beneficiation is taking place locally. One of the persistent criticisms of the South African mining industry is that beneficiation sometimes takes place in other countries, and South Africa is then required to buy back the processed resource. As a developing economy, this is a trend that South Africa should try to reverse, as the implementation of local infrastructure and technology will create jobs and increase the national GDP. The chrome industry is an example of how mining and beneficiation can both take place locally, serving both the local and export markets.

Mining the platinum is a dangerous process because mines in South Africa tend to be deeper than in other parts of the world. This is possible because the rate at which the temperature increases as you go deeper into the earth (technically known as the “geothermal gradient”) is much lower in South Africa than elsewhere. This means that even at a depth exceeding 3km the temperature is not much more than 50 degrees Celsius. Platinum mines are shallower than gold mines. Platinum beneficiation takes place in South Africa.

The massive reserve of platinum in South Africa represents an opportunity for economic prosperity in the country. This issue has become more prominent in recent times due to the approach of the African National Congress Youth League, whose leader insists that mines in South Africa should be nationalised. Black Economic Empowerment (BEE) efforts in the mining industry have substantially altered shareholdings in the sector, but perhaps for some political figures this change has not been sufficient.

However, mining is an extremely important element in the economy of South Africa and it needs to be managed very carefully by those who have the necessary expertise to do so. Nationalisation should not be implemented due to partisan political agendas. The enormous proportion of the global reserves of platinum that is present in South Africa gives the country a dominant say in the supply of the metal on an international basis. Tampering with the supply of platinum through political interference or misguided economic policies could therefore be to the detriment of South Africa’s GDP, by several percentage points, as well as the country’s international standing and trade relations. At a time of recessionary conditions in the international economy, a precious metal like platinum, which is required in industry, may remain in demand and therefore represents a relatively stable source of export income. In 2009, mineral exports accounted for nearly a third of South Africa’s total merchandise exports and generally mining generates nearly a fifth of South Africa’s GDP.

The irony is that while nationalisation of the mines is paraded as a method of alleviating poverty in South Africa, if it is not implemented sensibly it may have the opposite effect.

South African Reserve Bank governor Gill Marcus, however, has contradicted the Minister, saying that South Africa is not in a position to provide that kind of assistance to the IMF.

“My own approach would be that it needs the Group of 20 as a whole to look at what needs to be done, because it is not for us to plug gaps,” she said. “There has to be a coherent strategy, a co-ordinated approach and they have got to take the decisions. We can’t solve Spain or Italy. It is their job.

“Our reserves are nothing like China’s. China’s are in the trillions, we have US50 billion.”

This kind of conflicting position is not desirable, because the government of South Africa has traditionally followed an inflation-targeting macro-economic policy, which requires that the Finance ministry works closely with the Reserve Bank on issues like the prime lending rate and the size of currency and gold reserves. The Minister and the governor need to iron out their difference publicly.

Finance Minister Pravin Gordhan

At the same time, even if South Africa provides a “couple of hundred million dollars”, that is not going to make a sizeable impact on the crisis in Europe. Divided between the five Piigs nations, it pans out to an average of USD40 million each, which is chickenfeed in terms of solving the debt isses of a developed nation. The Minister therefore needs to be more specific as to how the money is going to be used in Europe. It is unlikely to be used for humanitarian aid in the Euro context, but should it really be used to prop up collapsing commercial banks who have over-extended their lending policies?

However, one issue that could be central to the Minister’s stance is political. As the Finance Minister of South Africa, Minister Gordhan has a certain responsibility to assist in maintaining sound economic relationships with other countries. Europe has traditionally been a major trading partner of South Africa, and so even if the South African contribution to the IMF’s rescue package is not enormous, its size is probably based on the ability of South Africa to make any such contribution and as an exercise in diplomacy it may well be necessary. The governor of the Reserve Bank, on the other hand, does not have nearly the same political aspect to her position. The Minister’s spokesperson has also said that the contribution, if made, won’t be drawn from South Africa’s reserves.

Another objection to the contribution is that South Africa has a heavy domestic burden in terms of assisting other southern African countries. However, this objection may be slightly exaggerated because the only two neighbouring countries requiring substantial assistance are Swaziland, who have already been given a ZAR2.4bn facility, and Zimbabwe. According to estimates, about 50% of the population of Zimbabwe twenty years ago already live in South Africa anyway, so in that sense the South African government is indeed contributing to the welfare of the region.

Sources: Cape Times, Zimbabwe Telegraph

The outlook for retail chains isn’t rosy at the moment in South Africa. Even though stable macro-economic policy and a balanced portfolio of trading partners has given South Africa a measure of protection against global recessionary conditions, inflation is down and growth in the retail sector is hardly into double figures. Shoprite, a lower-priced mass retailer mainly of groceries, achieved growth of about 12%, but that figure is relatively high in the present environment and is probably due to cash-strapped consumers seeking cheaper alternatives. The CEO of Shoprite is a somewhat controversial figure because he received annual payment of around ZAR627 million for one year. Pick ‘n Pay, another traditional South African chain (which is also trying to establish an international presence) recently announced the retrenchment of about 3500 staff and then introduced a loyalty-card system for customers, which has not, according to some analysts, led to a substantial increase in customer numbers. The drop in Pick ‘n Pay’s profit is probably due in part to the outlay of the card system and also the restructurig of their distribution network. The other main brands, Checkers and Spar, have also shown growth, but nothing phenomenal. In other words, the retail sector in South Africa is very competitive, especially in adverse economic conditions.

The entry of Walmart is therefore a potential catalyst of conflict. The main retail brands in South Africa have all been in business for many years. They all offer mostly the same products at mostly the same prices. The only real competition, therefore, is caused by pricing. If Walmart is able to introduce significantly lower prices into the market, it is likely that consumers in South Africa will be attracted to that kind of offering. This is one reason why local retail brands may not be very enthusiastic about the entry of Walmart.

The other issue is that Walmart’s business model may not be the same as the traditional retailers in South Africa. This is a point of contention for the relevant labour union, the SA Commercial, Catering and Allied Workers’ Union (SACCAWU), who insist that the merger deal needs to include the reinstatement of the 574 Massmart employees who were retrenched prior to the merger, and also some form of protection against the Walmart recruitment model.

It will be interesting to see how the Competition Appeal Court views SACCAWU’s stance because South Africa has a long history of active trade unions. The unions were involved in the anti-Apartheid struggle and they still have millions of members if their membership figures are combined. Walmart may have to adapt its business model to the South African labour environment, which may in turn make the retailer less competitive in the country.

For those who are unfamiliar with the situation in South Africa, there are three main types of fuel – petrol (gasoline), diesel, and paraffin (kerosene). Then there is also gas, but gas is not a staple fuel in most households. Paraffin is used for cooking and heating, as well as for lighting, and along with gas its price is linked to the same formula that is used to determine the prices of petrol. The price of diesel is not regulated in South Africa, so it sometimes pays to shop around if you are dependent on diesel.

The formula used to calculate the petrol price has two components – the international factor, and the domestic factor. The international factor is a simulated price that is supposed to represent the equivalent cost of importing the petrol from an overseas refinery. In other words, it is an import parity price in a country which has its own refineries. I do not want to enter into the merits of that debate at this time. The domestic factor is composed of various individual elements such as state levies and the operational costs of providing the petrol to the consumer at the pump. The price of petrol is determined on a monthly basis, and changes on the first Wednesday of the month, if it changes for that month at all.

South Africa has no significant (or any) reserves of oil. What this means is that, besides the limited output of the solid-to-liquid technology in use in the SASOL plant in the north of the country, South Africa depends on imported crude oil to meet its domestic fuel needs. The price of crude oil therefore has a direct impact on the petrol price in South Africa.

It should therefore be obvious that, unlike an oil-producing country, South Africa is unable to stabilise the price of petrol and other related products. The levies instituted by the government are significant, but they are also necessary. At the same time, one may ask to what extent the filling station owners are deriving economic benefit from each price increase. The answer is – probably very little. The profit margin on a filling station in South Africa is actually surprisingly low, which is why they typically have other supplementary revenue streams such as convenience stores and carwashes attached to the station. Besides which, it isn’t the station owners who have the most say in determining the price. It is the government. The retailers merely take a fractional cut, and when there is poor or no supply they make no income.

This is why the claim last week that the most recent price increase of around 33c per litre of petrol is due to a hike in wages for filling station staff needs to be viewed in light of the low margins that the station operators are taking home. A 9% increase in wages is not necessarily so easy for the station operators to accommodate.

The real problem with increases in the price of petrol, however, is that they tend to be inflated into issues causing near hysterical outrage. Unless you live in an OPEC country or the USA, can you really expect to pay less for petrol than for milk? Geographically, the only way that South Africa can be supplied with crude oil is by sea. Then the country itself has widely spaced urban centres, which adds to the transport costs. Many people in South Africa do not own or drive private vehicles, either, so demand is not as high as the population size may suggest. These factors encourage inflation of the price, not to mention the global recessionary conditions that we are seeing at the moment, in which practically everything costs more, no matter where in the world you live or do business.

Usually, when a price increase is announced, the headline will be large and the article will be relatively lengthy. However, when a decrease in the price occurs, the article will tend to be small, somewhere deep within the newspaper, and short. One could argue that this is because the price never moves downwards as drastically as it moves upwards, and that may be an interesting argument in itself, but you have to wonder why the media in South Africa seem so eager to trumpet a price increase when it demoralises the public and may be reversed in the subsequent months. It also causes absurd behaviour, such as people rushing to filling stations to fill their tanks on the Tuesday night before the price increases.

In 1985, the price of petrol in South Africa was about one rand per litre. This shows that in the last quarter century inflation has taken place, which it has in just about every other industry as well, at the same tim as the South African currency has softened in international trade. And the projected price of about ZAR11 per litre next month is not breaking new ground. We saw a similar price level during the global recession in 2008. Perhaps news publications should do the public the favour of mentioning such statistics when they try to sensationalise a price increase. And they do indeed try to sensationalise the issue. Why is a 33c increase “whopping”? What will they say when the price comes down again? Or will the decrease merely have a tiny one inch article on page ten?