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The Citizen
6 days ago
- Business
- The Citizen
US tariffs: fragmentation and reshaping global supply chains and African MNEs
South Africa has reportedly reached an agreement with the US about tariffs, but government is keeping it under wraps until it is finalised. The US tariffs that will be implemented on Friday if countries do not make a deal with US president Donald Trump, will mark a fundamental economic shift towards fragmentation and reshape global supply chains and African Multinational Enterprises (MNEs). Arthur Kamp, chief economist at Sanlam Investments, warns that the sharp rise in US tariffs represents a significant shock to the system due to its stagflationary risks. 'You would expect higher inflation and lower growth in the US. After all, this is effectively a significant tax increase.' However, despite market calm, he cautions that from a macroeconomic perspective, the backdrop has worsened. The current US tariff for South Africa is 30%. Roy Mutooni, portfolio manager at Sanlam Investments, believes the initial market reaction may have been overly complacent. He explains that tariffs typically hurt companies in one of two ways: either manufacturers absorb the costs, which squeezes margins, or they pass them on to consumers, which dampens demand. 'It seems to me that the market's initial response was to derate – to reduce the value of future earnings. Then, as uncertainty grew, markets began assuming it would all be rolled back. That is the prevailing view now – that the full effect of the tariffs will not materialise,' Mutooni says. ALSO READ: US tariff of 30% on SA exports: where to now? US tariffs shock will likely affect margins and consumer demand However, he cautions that this represents 'very much the best-case scenario' and warns that the shock is likely to affect margins as well as consumer demand. Kamp's core observation is that the world is changing. 'We have come from an era of global integration, freer trade, low inflation and high growth. That is clearly changing with increasing protectionism, trade barriers, financial sanctions and a shift toward a more geo-economically fragmented world. 'We are moving into a more difficult environment for multinationals, with potential disruptions to capital flows already evident in some cases.' Mutooni adds that the traditional global trade model, with emerging markets supplying commodities to Asia and Asian economies exporting to the US consumer, is starting to break down. 'What the US is saying is: you will pay a toll or tax to access our consumer. And for the rest of us, there is no alternative.' This shift leaves investors needing to assess how companies will adapt, whether by finding new markets, changing business models, or investing in the US. 'Effectively, as an investor, you are still stock picking, but you must do it in the new context. 'Key questions include: how is the company dealing with the changed environment, how are its supply chains adapting, can its customer base handle the higher costs and are there new competitors emerging better able to navigate the changed circumstances, such as domestic producers or those from countries with lower tariffs and is management looking to new markets?' ALSO READ: Ordinary South Africans will feel impact of US tariffs Multinational enterprises will face complex questions under US tariffs, expert warns Michael Hewson, director at specialist African transfer pricing advisory firm Graphene Economics, says as Trump's second term seems set to be defined in part by a renewed surge of tariffs and trade protectionism, MNEs face complex questions about supply chains, profit allocations and the overall structuring of their global value chains. 'A key area under pressure is transfer pricing, the term for how multinational groups set the prices for transactions between related entities in different countries. These prices affect where profits are reported and in turn, how much tax is paid in each jurisdiction. 'While transfer pricing is usually a behind-the-scenes concern for finance and tax teams, it becomes highly strategic in times of global economic upheaval.' He says tariffs, which tend to be used to shield domestic industries from foreign competition, act as a tax on imports. 'Trump's focus on introducing new tariffs and his swift changes of direction regarding implementation triggered retaliatory actions from certain trade partners and injected fresh uncertainty into global markets. For African-based MNEs, or those routing goods through Africa to the USA, the impact could be substantial.' ALSO READ: 'Open our eyes and ears' – Ramaphosa on how to tackle US tariff hike on SA cars MNEs manufacturing in Africa will have to reconsider supply chains considering US tariffs Hewsom says MNEs manufacturing in Africa and then distributing into the US will need to consider their value chains. 'For example, imagine a South African company that manufactures automotive components and sells them to its sister company in the United States, which then sells the completed vehicles to American customers. The price at which the South African company sells the parts to its US counterpart is the 'transfer price'.' He points out that revenue authorities in South Africa and the US want to ensure that the price of these components reflects what independent businesses would charge each other, known as the arm's length principle. 'If the price is deemed not to be arms-length, one country might claim it is losing out on tax revenue, which can lead to audits, penalties, or even double taxation. If the US levies high tariffs on South African goods, including these car parts, the multinational group may need to ask whether it makes sense to continue manufacturing in South Africa, or to use one of the other plants in the world that may have lower duties imposed. 'Or it might ultimately decide it is better to build a plant in the USA. These decisions have potential tax consequences. For example, if the profitability of the South African entity reduces because production is shifted to another company within the group, it may be considered as a business restructuring for transfer pricing purposes.' ALSO READ: Devastating impact of US tariffs on SA automotive sector even before implementation US tariffs will affect MNEs on many levels Hewson says that when tariffs raise input costs or make cross-border goods less competitive, traditional intercompany pricing structures may no longer reflect economic reality. 'This affects MNEs on many levels, from shrinking margins to costly compliance breaches. However, the knock-on effects on African economies can also be substantial. 'The ripple effects of tariff-driven supply chain realignments and transfer pricing adjustments can be significant for African economies. If, for example, the car manufacturer decides to shut down its local car parts plant in favour of producing in a lower-tariff country or relocating operations to the US, this could lead to significant job losses in a country already grappling with high unemployment and widespread poverty,' he warns. 'Reduced industrial activity also means lower tax revenues for African governments and diminished demand for local suppliers and service providers. In economies where multinationals play a crucial role in employment and development, these decisions, while financially prudent from the MNE's global business perspective, can have negative local consequences.'
eNCA
24-07-2025
- Business
- eNCA
Tackling youth unemployment using the blue economy
JOHANNESBURG - As South Africa holds the G20 presidency, a major opportunity is emerging to tackle youth unemployment. Experts say it can be resolved using one of the continent's most overlooked economic levers, the blue economy. Teboho Makhabane, Head of ESG and Impact at Sanlam Investments, discusses the opportunities.
The Citizen
20-05-2025
- Business
- The Citizen
Budget 3.0: pressure and expectations are building
Economists expect that the minister of finance will cut the economic growth expectations in Budget 3.0 that he delivers tomorrow. With Budget 3.0 loading, economists expect that Minister of Finance Enoch Godongwana will deliver it on Wednesday afternoon with the blessing of the government of national unity (GNU) this time. The pressure is building along with economists' expectations. However, Godongwana will be walking a tightrope to balance politics and fiscal sustainability after two failed attempts in February and March due to opposition to the proposed VAT increases, Patrick Buthelezi, economist at Sanlam Investments, says. 'Political tension persists within the [GNU], particularly between the ANC and the DA, raising serious concerns about its durability.' He pointed out that since Budget 2.0, the economic outlook has deteriorated due to global protectionist trade policies and unusually high economic policy uncertainty. 'We expect the finance minister to revise the gross domestic product (GDP) growth forecast downward from the March estimate of 1.9%, in addition to cancelling the VAT hike. Consequently, the revenue shortfall will be higher than the projected R75 billion over the medium term.' ALSO READ: Budget 3.0: Godongwana under pressure to make up for downgraded growth No political appetite to increase taxes in Budget 3.0 Buthelezi said there is clearly no political appetite to increase taxes, judging by the two failed budgets. 'Therefore, maintaining the government expenditure plans presented in budget 2.0 will result in a wide budget deficit and higher borrowing. The deficit will probably be wider in the near term, albeit the medium-term trajectory is expected to improve. 'National Treasury's fiscal strategy is to limit borrowing and focus on stabilising elevated government debt by running the primary budget surplus. They will probably stick to that approach. 'In addition, debt servicing cost is very high, absorbing nearly 22% of the main budget revenue. Adding more debt would further divert resources from critical expenditures to interest payments, eroding fiscal space.' He said Sanlam Investments expects Budget 3.0 to focus more on expenditure cuts. 'However, there is limited time for a comprehensive expenditure review. Treasury would have done extensive work to present areas where savings are feasible during the medium-term budget policy statement in October. ALSO READ: Budget 3.0: time to fix our economy – BLSA Godongwana expected to keep revenue-raising measures 'The revenue-raising measures announced in March will probably be maintained, such as not adjusting personal income tax brackets for inflation and introducing an above-inflation increase in excise duties. We are not expecting a new tax policy, but rather a continued effort to strengthen the South African Revenue Service (Sars).' He said the persistent pressure on government finances is not a revenue problem, but rather a low economic growth trap. 'Government should prioritise growth-promoting areas, such as investment outlined in phase 2 of Operation Vulindlela to achieve a high growth trajectory in the future. Without an improved economic growth path, the debt trajectory will continue to rise. 'Finally, the GNU must collaborate more effectively to prevent volatility in the budget process and a potential fiscal credibility crisis. Overall, there are still a lot of unfunded expenditure pressures which raise execution risk.' ALSO READ: Budget 3.0: will it be third time lucky for Godongwana? Budget 3.0 not the only thing that needs GNU agreement Mamello Matikinca-Ngwenya, Siphamandla Mkhwanazi, Thanda Sithole and Koketso Mano, economists at FNB, say although it is an anomaly that Godongwana has to try to deliver the national budget for the third time this year, it may become a feature of the GNU. 'The original February budget proposed a 2% VAT increase from 15% to 17%. The revised March budget introduced a phased approach with a 0.5% increase to take effect on 1 May 2025, followed by another 0.5% increase on 1 April 2026, increasing the Vat rate to 16%. 'Scrapping the proposed VAT hikes left government with limited fiscal options. It now faces the challenge of identifying alternative revenue sources or significantly reducing and reprioritising expenditure. Against a challenging economic backdrop, achieving stronger revenue growth will be increasingly complex.' The FNB economists pointed out that since the start of the year, the global environment has been marked by heightened uncertainty around trade and economic policy, primarily driven by US tariffs and escalating trade tensions. As a result, they said, global as well as domestic growth forecasts have been revised down from the assumptions that would have underpinned the first two budgets tabled on 19 February and 12 March. ALSO READ: Economic activity slows in April as economy struggles Budget 3.0 allocations will have to be adjusted They also pointed out that the International Monetary Fund (IMF) lowered its global growth projections to 2.8% for 2025 and 3.0% for 2026 from 3.3% previously. 'Our forecast for South Africa's real GDP growth has been revised to 1.3% in 2025 and 1.6% in 2026, from 1.9% at the start of the year. 'These weaker growth projections, coupled with the VAT freeze, point to a likelihood of a sizeable tax revenue shortfall.' Matikinca-Ngwenya, Mkhwanazi, Sithole and Mano said government earmarked R46.7 billion for infrastructure investment over the 2025 Medium-Term Expenditure Framework in the previous budget statements, with: R23.4 billion for the 2025 public-service wage agreement and its carry-through costs, R11 billion for early retirement costs, and R35.2 billion for the Covid-19 Social Relief of Distress Grant (SRD). 'While adjusting allocations related to the public-service wage agreement and SRD grant will be difficult as [its continuation] is another recent outcome of judicial rulings, there may be some flexibility to scale back early retirement costs. 'Infrastructure investment could also be scaled down, but without escalated attraction of private sector savings, such spending reprioritisation would be concerning.' ALSO READ: Minister of finance says no to wealth tax Budget 3.0 must also include fiscal consolidation They say other spending allocations included R23.3 billion for an above-inflation increase in social grants, as announced in the 19 February budget, which was later revised down to R8.2 billion in the 12 March budget. 'Similarly, provisional allocations for frontline services were reduced from R75.6 billion to R70.7 billion between the two budgets. To offset a potential revenue gap, these allocations could face further reductions.' The FNB economists said in the face of these challenges, government must still demonstrate a credible path towards fiscal consolidation. 'However, there is a growing risk that the primary surplus, government's key anchor for stabilising debt, will be under significant pressure. 'As a result, public debt may peak at a higher level than the 76.2% of GDP projected for 2025/26 in the 12 March budget. Our current baseline view incorporates these risks and is reflected in our sovereign rating outlook, which suggests that an upgrade by S&P Global of South Africa's local and foreign currency ratings to BB and BB+ may be delayed until next year.'
Eyewitness News
19-05-2025
- Business
- Eyewitness News
Budget 3.0: Godongwana should prioritise economic growth, says economist
JOHANNESBURG - A tough week of fiscal juggling awaits the National Treasury this week as Finance Minister Enoch Godongwana prepares to table budget 3.0 on Wednesday. This follows two failed budgets that saw political and public outrage over proposals to raise the standard value-added tax (VAT) rate. Godongwana will now have to plug fiscal gaps without further ruffling feathers with higher taxes. Some economists believe Godongwana will play it safe this time around to avoid another impasse. Already getting the thumbs up from Cabinet, some political parties are said to be on board with Godongwana's latest budget. With value-added tax (VAT) off the table, an economist at Sanlam Investments, Patrick Buthelezi, says Godongwana's focus is likely to be on slashing government expenditure. 'Again, the problem with government finances is low economic growth, not revenue. Therefore, government should prioritise growth-promoting areas like investment to achieve a higher growth trajectory in future.' Buthelezi says he expects a projected revenue hole of about R75 billion over the medium term and a deterioration of the economic growth outlook due to trade wars and global policy uncertainty. 'We expect the minister to revise economic growth forecast lower, from an estimate of 1,9%.
