Tree top retailers, Woolworths, Massmart and Truworths International are sticking to their original investment plans believing pledges from the new president that any hit to consumer spending by the VAT hike will be outweighed by the budgets attempt to revive the economy.
On Wednesday Finance Minister Malusi Gigaba delivered his maiden Budget speech and announced that valude-added tax (VAT) will be increased for the first time in 25 years in attempts to cut the deficit and stabilise debt under newly elected President Cyril Ramaphosa.
The VAT hike is set to increase the cost of loving for consumers already struggling with a stagnant economy, high unemployment and a high personal debt.
Despite this, Woolworth’s Chief Executive Ion Moir said on Thursday that the country’s new leadership and thus a return of confidence among consumers could outweigh the 1 per cent increase in VAT.
“I think most of our customers are going to think the budget, being fiscally responsible, is the right thing. That is going to have such a positive on the psyche and that’s going to more than negate the negative impact of the 1 percent increase in VAT,” Moir said.
“I think most of our customers are going to think the budget, being fiscally responsible, is the right thing. That is going to have such a positive on the psyche and that’s going to more than negate the negative impact of the 1 percent increase in VAT,” Moir told Reuters.
Moir’s positivity is supported by a more than doubling in capital expenditure for 2018 to R3.8 billion ($326 million), although some of the money would be deployed in Australia, where Woolworths runs the David Jones and Country Road chains.
Woolworths, which sells food, homeware and groceries, did not specify what the money would be used for in a presentation of its half-year results, which showed hefty write-downs and a 15 percent drop in headline earnings per share.
Massmart’s Chief Executive Guy Hayward is equally confident and said the VAT hike would only be slightly negative for a while but would settle down.
“I think there are some positive factors that will put more money into people’s pockets and those include lower inflation, stronger rand and possibly lower interest rates.”
According to Hayward, Massmart, which is South Africa’s Walmart’s unit that sells groceries, electronics and building materials, plans to open 34 stores at home over the next three years.
On Thursday the company reported a small increase in full-year profit. Massmart was also among the better performing stocks on South Africa’s general retail index, rising 8.81 percent, while Woolworths gained 1.85 percent.
Woolworths’s competitor in the clothing market,Truworths, opened 25 stores across all brands in the 26-week period ended December 31. Its business was also boosted by the acquisition of a homeware chain, which added a further 13 stores.
Truworths International CEO Michael Mark said: “There is no question that we are, really for the first time in quite a few years, moving in a much more positive direction from a sentiment point of view.”
Bernard Drotschie, deputy chief investment officer at Standard Bank boutique asset manager Melville Douglas said that although the consumer would be negatively affected from higher taxes in the near “this should be more than offset from the potential for lower interest rates and improved consumer and business confidence.”