Business leaders look set encounter manifold challenges in 2014 in the face of headwinds buffeting the local economy, and unrest and uncertainty across the globe.

 

As South Africa enters its third year of a struggling economy, companies need to continue to streamline their operations and take unnecessary costs out of the business. Leaders must deliver seamless strategy execution, innovation and process excellence.

 

The challenge is to spot opportunities locally, and gear up to tackle fast-growing markets in other African countries and overseas.

 

Economic rumbles include a weakening rand, labour union turf wars, corruption, and confrontation between unions and management. Globally, there are energy deliberations, social upheaval, skilled labour deficits, youth unemployment and inequality.

 

South Africa is not alone. Greater specialisation and division of labour between skilled and unskilled people has widened the skills gap at a national and global level. According to a new Oxfam study, 50% of the world’s wealth is in the hands of the 85 richest individuals. Inequality is one of the main issues occupying the minds of delegates at the World Economic Forum’s annual meeting taking place this week in Davos, Switzerland.

 

Within South Africa, there are pockets of excellence where people are doing remarkable things. The fast-tracking of green energy initiatives – supported by government – is one example. Then there’s the R9-billion Square Kilometre Array (SKA) radio telescope – the biggest, most sensitive radio telescope ever built, slated to move from “concept to concrete” this year.

 

In the technology space, we continue to show we can innovate with the best in the world. Space tourist Mark Shuttleworth and inventor Elon Musk come to mind. More recently, a Durban start-up has developed a mobile point-of-sale terminal that allows traders to accept card payments using their phones. And a Midrand entrepreneur is about to launch the first locally-made smartphones and tablets.

The majority of South Africa’s graduate professionals are concerned about the low level of savings among consumers and support the idea of some form of compulsory preservation vehicle to foster a greater savings culture, according to a survey conducted by .

Ten of SA’s top companies have unanimously claimed to be positive about the country’s business outlook for 2013 in a recent anonymous survey. But their optimism was tempered by the familiar concerns dogging local businesses.

Softline, part of the Sage Group PLC, has released the results of The Sage Business Index – Local and International Business Insights.

 

The Index is a global measure of confidence across small and medium sized businesses. Nearly 11,000 small and medium sized companies in 15 countries across Europe, North America, Brazil, South Africa and Asia responded to the survey. The Index shows that whilst there is a general decline in confidence in global and local economies, businesses remain cautiously optimistic in their own growth prospects.

 

In South Africa, confidence in both individual business prospects and the outlook for the global economy remain largely unchanged, down slightly from March 2012 (Index scores: 64.44 to 64.19 and 44.71 to 44.54 respectively). Confidence in South Africa’s own economic prospects has fallen slightly further from 46.11 in March 2012 to 43.03 in September 2012.

 

South African Index Scores*	September 2012	March 2012	September 2011
Global economic confidence	44.54	44.71	45.92
SA’s Country economic confidence	43.03	46.11	44.10
Own business confidence SA	64.19	64.44	62.58

 

 

 

 

 

 

(Below 50 is decline/less confident above 50 is improvement/more confident, 50 is no different)*

The research, which included 1 879 South African small to medium size businesses, was carried out by Populus, a UK based opinion and research consultancy firm.

 

Economic confidence – local concerns in line with macro-economic trends

All countries, with the exception of Brazil registered an index score below 50 showing that respondents generally feel that the global economy is continuing to decline. Unsurprisingly, the Eurozone countries feel the most negative, with fears of a “double dip” recession having risen sharply.

 

In South Africa, businesses surveyed are feeling less confident about the prospects for the local economy, with the index declining from 46.11 to 43.03 over the past 6 months. This, however, is in sharp contrast with how they feel about their own business prospects which scored positively at 64.19.

 

Commenting at the official results presentation in Johannesburg today, Ivan Epstein, CEO (and co-founder ) of Softline and Sage AAMEA (Asia, Australia, Middle East and Africa) said, “Looking at the results against an international backdrop, South Africa scored the second highest index rating of all the countries polled in terms of individual business confidence. Entrepreneurial spirit and business culture is identified by businesses as one of the most important aspects for doing business successfully in South Africa. This endorses my strong belief that South Africa is a fertile environment for successful entrepreneurs and small businesses.”

 

Business performance and challenges - revenues maintained, cost challenges

There are some positive signs in the global survey with 63 percent of respondents saying that over the past 6 months revenue has either increased or held steady whilst 82 percent have either increased or maintained employee numbers.

 

South Africa achieved a similar score with 65 percent of businesses polled showing either steady or increasing revenue and 84 percent of businesses either increasing or maintaining employee numbers.

 

Rob Wilkie, CFO of Softline and Sage AAMEA commented that “72 percent of South African businesses said that they have adapted to the challenges of the current economic climate. The agility and resilience of businesses in South Africa is testament to a strong entrepreneurial business culture and strength of South Africa as a place to do business”.

 

Increasing costs are the number one concern of businesses surveyed in South Africa. Wilkie commented that “this was expected given that CPI is on an upward trend with the main drivers being food prices, fuel and electricity. In addition, an inevitable consequence of the recent high wage increases seen in the mining and transport sectors is going to be higher inflation, particularly when decoupled from increased productivity”.

 

Government – businesses call on government to do more

All countries participating in the global survey feel that their governments don’t provide sufficient support for business, with the exception of Singapore where 54% of respondents indicated that their Government provides adequate support.

 

In South Africa businesses are calling for skills development and education (46%), the reduction of bureaucracy and legislation (40%), a reduction in business tax (34%) and currency stability (28%).  Wilkie commented, “in order to enhance its competitiveness, government must address the quality of primary education, particularly in view of a very high unemployment rate. Overregulation and red tape is a further obstacle, specifically firing and hiring practices, wage determination, public sector tender procedures and enforcement of contracts”.

 

Investment for growth – future prospects

In considering the year ahead, 29 percent of South African businesses surveyed said they were looking to diversify into new markets, 28 percent would invest further in marketing and sales within their existing markets and 27 percent would invest in skills development and training. 

 

According to Epstein, “economic and political reforms in Africa have resulted in an improved business environment and offer an attractive opportunity for South African businesses to diversify and expand across their border.”

 

In conclusion Epstein said, “We’ve seen evidence in this research report and others, that small and medium sized business in South Africa require more focussed attention from our leaders. The future of the South African economy, and most importantly, the ability to create employment in this country will be dependent the stimulation of more businesses that are sustainable over the long term. Private business and Government have a pivotal role to play in the economic growth and development of small business in South Africa.”

Value-Added Tax (VAT) is fast emerging as the tax of the future, with governments worldwide shifting their focus from direct taxes to indirect taxes in the wake of the recent economic uncertainty. Rising budget deficits have placed pressure on many governments to look to raise additional forms of revenue, and they are increasingly turning to indirect taxes as the solution.

 

These are some of the highlights from PwC’s inaugural edition ‘Charting the changes, 21 years of VAT in SA’, which outlines the numerous reforms that have taken place in South Africa and on the African continent over the period as well as some of the challenges that lie ahead for the market.

Charles de Wet, PwC National Leader for Indirect Tax, says: “Indirect tax policies, legislation and compliance with the law are all under increasing scrutiny from governments and tax authorities.

 

“From a risk management perspective, it is important that VAT be managed properly as it can become a huge expense for a company if it is not correctly accounted for.” De Wet says that minor errors and flaws can have a cumulative effect where the volume of transactions is significant. Furthermore, if the VAT process is not adequately managed, it can have an effect on an organisation’s bottom line and even disrupt procedures and processes.

“Companies face significant compliance risk coupled with hefty penalties and interest levied by the tax authorities, as well as disruption to businesses and increasing reputational risk.”

 

Worldwide the efforts of governments to improve tax compliance have also placed increasing pressure on companies to put risk management high on the board’s agenda, he says. “The tax function needs to assume more responsibility for tax than the finance function of the organisation. Clear policies need to be put in place as to how the VAT function should be managed.”

 

Tax departments have up to now tended to focus their attention on direct taxes. “This will have to change with the emphasis being placed on VAT and indirect taxes,” says De Wet. “Organisations need to put adequate and efficient resources, processes and technology in place to manage VAT challenges.

“On the face of it, VAT may seem a simple and acceptable tax to businesses as it is passed on to the consumer. However, there is an invisible cost to organisations which is extremely high and burdensome, namely that of compliance with the law.”

 

De Wet says although the basic principles of VAT are similar in most countries, the administrative practices, and rules and regulations applied tend to differ which can affect the compliance burden for businesses. VAT returns are required at different frequencies; monthly, bi-monthly, or quarterly, he explains. “This will have a significant effect on how long it takes a business to comply with VAT.”

 

South Africa is considered to have one of the highest VAT burdens in the world, according to research carried out by PwC Tax Services. It takes far longer for companies to comply with the VAT laws than corporate income tax. Companies have to complete three tax returns for company tax purposes. Organisations with an annual income of more than R1 million have to complete 12 tax returns for VAT purposes.

 

The PwC report highlights the increasing focus on improving the administration of VAT, including the use of electronic filing of VAT returns and reducing the compliance burden on the taxpayer, with the report drawing on data gathered from analysts across the PwC Southern Africa indirect taxes network.

 

To date VAT has been implemented in 151 economies worldwide.  De Wet says there is no VAT system in the world without flaws if one has to carry out a comparison and review of such systems. “There is a need for the tax authorities to eliminate non-compliance with the laws and fraud.” Established VAT systems such as those in the European Union appear to have fewer opportunities for fraud and higher levels of compliance than those introduced in the past decade.

Other key highlights from the PwC report include:

• Most countries in Africa tend to apply a single tier system of VAT, which, if properly administered is better than sales or turnover tax, as it leaves an audit trail;
• South Africa’s banking system could face higher VAT costs in the wake of new regulations;
• State owned entities need to include VAT compliance in their strategic planning activities and where necessary, be prepared to defend business and VAT decisions from tax officials;
• There is a general trend for tax authorities to take a more aggressive approach to compliance and penalties are reflective of this;
• All countries with a VAT regime are now using automation to some degree.

The downgrade of South Africa’s government bond rating by one notch to Baa1 from A3 by Moody’s Investors Service is premature, according to Melanie Brown, CEO at Global Credit Ratings (GCR).
Brown says a key input into any decision about South Africa’s credit rating must be the conference in December. “While we disagree with the move by Moody’s, it does not come as a complete surprise. Of the three international rating agencies, Moody’s rating was a notch higher.”

This latest move means that Moody’s, Standard & Poor’s and Fitch all currently have a credit rating of BBB+ on South Africa with a negative rating outlook, meaning the next move would be a downgrade to BBB.

Brown notes that an economy such as South Africa, which remains reliant on transformation and development, needs to provide investors with regulatory certainty and administrative efficiency. “This in turn requires laws and policies that are clear, definite and consistently applied by the current administration and its successor, with any policy changes a result of the shifting economic landscape, so as to maintain stable debt ratios.”

She says continuing strikes and wage demands are having a hugely detrimental effect on South Africa’s image around the world. “Perhaps more importantly, they come at an already difficult time when international ratings agencies had already expressed their concern about populist pressure and uncertainty around policy direction, which could undermine commitment to low budget deficits and debt targets.’’

“Whilst some market movement and rand weakness is expected, I don’t believe it will be significant because the move aligns Moody’s rating with the other two, so it’s largely driven by sentiment at this stage. However, if the rating moves from BBB+ the impact will be far more significant,” she says.

In its report, Moody’s said the current fractious domestic environment is not conducive to reforms being implemented. In addition, while government is working towards a stabilisation of the debt-to-GDP ratio through increased spending discipline, the agency noted that these plans were rendered more challenging given recent events.

 

Click here to read the official Moody's report.

The financial results of South Africa’s four major banks for the six months ended 30 June 2012 have remained resilient despite the recent global economic uncertainty, according to a report issued by professional services firm PwC.

“Although in most cases not directly, our banks have had to cope with another six months of global financial instability, particularly in Europe. The downside risks in Europe remain elevated, which is weighing heavily on market sentiment and it appears that will be the case for some time,” says Tom Winterboer, Financial Services Leader for PwC Southern Africa and Africa.

Despite these difficult economic circumstances, the four major South African banks (Absa, FirstRand, Nedbank and Standard Bank) posted combined headline earnings of R21.3 billion, up 17% from the comparable period last year and average normalised return on equity (RoE) of 15.9%. This compares favourably to a benchmark group of Western global peers that recorded average RoE for the 2011 financial year in the range of 2.1% for US commercial banks and 14.7% for Canadian banks.

“This was a strong performance by South African banks compared to the Western world. Even more interesting is the composition of earnings for local banks when compared to other countries, which shows that our banks have an enviable non-interest revenue mix and continue to operate at favourable efficiency ratios,” says Johannes Grosskopf, PwC Banking and Capital Markets Leader for Southern Africa.

These are some of the findings from PwC’s South Africa Major Banks Analysis Report. The report analyses the results of South Africa’s major banks for the six months ended 30 June 2012.

Capital levels continue to be a strength. Total qualifying capital and reserve funds across the major banks showed moderate growth. However, the combined total capital adequacy ratio of the major banks declined marginally by 50bps to 14.9% from 15.4% at the second half of 2011.The slower growth in capital and decline in capital adequacy levels reflect the capital challenges faced by the major banks. This is a result of six months of Basel II.5 implementation as well as the prospect of Basel III regulations set to be implemented on 1 January 2013.

“The major banks have all indicated that the transition to the higher capital requirements anticipated by Basel III will take place without significant difficulty or deterioration in regulatory capital levels. This can largely be attributed to ongoing risk-weighted asset optimisation initiatives of the major banks, a prudent approach to business as well as the relatively prudent regulatory capital regime adopted by the regulator over the years,” says Grosskopf.
However, there is some uncertainty over key aspects of the regulations, such as countercyclical buffers, domestic systemically important banks surcharge and the finalisation of the recovery and resolution regime that will affect the final capital landscape.

Furthermore, it is expected that all of the major banks should be able to comply with the Liquidity Coverage Ratio (LCR) envisaged by Basel III requirements, supported by the committed liquidity facility that the Reserve Bank recently announced it would make available to mitigate potential liquidity shortfalls.

The most sensitive areas underpinning the results continue to be the banks’ ability to grow revenue, contain their bad debt charge and manage their cost base.

Total income, up by 12%, shows a focus on margin protection and transactional revenues. Compared to the prior period, banks’ operating expenses increased by only 1.5%, while total operating income increased by 4.8%. Consequently, their combined cost-to-income ratio improved from 58.1% in the first half of 2011 to 55.9% for the same period of 2012.

Salaries, which continue to represent about half of the total expense bill, grew at a rate of 12.6% in the first half of 2012, when compared to the same period for 2011. This increase reflects annual salary increases as well as the increased short- and long-term incentive awards associated with the improved operating performance of the banks.
“We have already seen that the next generation of productivity improvements will come from responding to changes in customer expectations by deploying strategic technology solutions,” he says. Leveraging distribution in the world of social media will require making further improvements in the use of customer analytics to unlock value. The key being able to integrate all the levers at the banks’ disposal to further improve customer engagement. These include rethinking product solutions in a Basel III world, harnessing technology for customer convenience, optimising internal centres of excellence and improving operational efficiencies.

Total balance sheet impairments increased 12.2% to R52 billion for the first half of 2012, compared to R48.8 billion at the end of the second half of 2011. Total income statement impairments increased 33.5% from the first half of 2011 to R14.2 billion at the end of the second half of 2012. Grosskopf points out that the banks have focussed on their NPL portfolios and the adequacy of their specific impairments on these portfolios. This focus will continue given the size of the NPL portfolio (which is in excess of R100 billion) and the state of the housing market.
Grosskopf concludes: “While there are some headwinds in the domestic economy and significant uncertainties from Europe, the banks continue to demonstrate the capability to manage and adapt. Compared to its international counterparts, the South African banking sector remains sound; being profitable, well capitalised and maintaining good returns on equity.”

Chartered accountants in South Africa (CAs [SA]) have grown increasingly confident in the last few months regarding the levels of ethics being practiced in their profession; however, this improvement hasn’t translated into their view of the wider economy with most voicing their concern over the levels of governance being applied in the country, according to a survey conducted by PPS.

The survey of more than 600 CAs(SA) revealed a confidence level of 74% for the second quarter of 2012 when asked whether they are confident that professional ethics still prevail in their profession, up nine percentage points from the previous quarter. Conversely, their confidence in the level of governance applicable in South Africa declined by three percentage points to 47%.