South Africans Are Offshoring Their Cash — Will It Cripple the Economy?
WHY YOU SHOULD CARE
Because it’s the second-biggest economy in Africa.
For the affluent in South Africa, life seems to flow smoothly. Well-to-do families live in the same homes in gated and manicured communities; they still drive German luxury cars and eat at upscale restaurants. But beneath this placid surface, the financial waters are churning as money pours out of the country. Instead of recycling profits back into their enterprises, business owners are investing abroad in property and equities. Some homeowners refinance and send the money overseas, and anyone who can remotely afford to do so keeps only enough cash in South Africa to cover monthly living expenses.
Prosperous South Africans of all racial backgrounds who fear for the welfare of their families are delivering a resounding vote of no confidence to their native land. Once a shining light among emerging economies, South Africa witnessed just 0.3 percent growth in the gross domestic product in 2016. In the first quarter of 2017, with trade and manufacturing recording negative growth rates, the country experienced its first recession since 2009.
The bad news piles up. Leading insurer Old Mutual has cut its 2017 growth forecast to a “sickly 0.8 percent,” according to Rian le Roux, the group’s chief economic strategist. Investor confidence — 29 percent and dropping — is almost as low as it was at the height of the 2008 financial crisis. In April, rating agencies Fitch and S&P cut South Africa’s status to junk.
Anyone who can remotely afford to has started to make lifestyle sacrifices in order to get as much money out of the country as possible.
John Lightfoot, owner, Quotient Financial Solutions
Some of these triggers are global. An international decline in commodity prices walloped South Africa, one of the world’s largest exporters of coal, gold, platinum and other minerals. Some of the problems are homegrown: South Africa is in the top 10 worst countries that report crime statistics, according to the United Nations Office on Drugs and Crime. And many wealthy South Africans are also just plain losing faith in a national government perennially plagued by cronyism and corruption scandals.
In recent years President Jacob Zuma sacked two well-respected finance ministers (and a third who lasted only four days) even as the South African press ran exposés that claimed Zuma spent some $19 million of the taxpayers’ money on his home. Almost daily front-page newspaper stories this year have revealed that most of the big decisions are not made by Zuma and his administration but by the Gupta family, a trio of wealthy, Indian-born brothers who seemingly wheedled their way into numerous government departments. The approval rating of Zuma, who won 62 percent of the vote in 2014, has plummeted to 20 percent.
For South Africa’s wealthiest people, plan B has suddenly become plan A. Official figures are impossible to come by, but the accountants and investment advisers I interviewed have observed a 50 percent increase in money leaving the country in the past few months. Ultra-high-net-worth South Africans have always sent money abroad, but now “anyone who can remotely afford to has started to make lifestyle sacrifices in order to get as much money out of the country as possible,” explains John Lightfoot, owner of Quotient Financial Solutions, a financial practice in Cape Town.
South African taxpayers in good standing are allowed to take around $770,000 offshore (at current exchange rates) every year. While earnings on this money are still taxed in South Africa, more and more people prefer to earn zero percent interest in foreign bank accounts (compared to 8.5 percent in South Africa) just to have the money safely out of the country. According to Roger Eskinazi, a wealth manager at AlphaWealth, some clients have been “paranoid enough” to mortgage their properties in favor of “a long-term offshore nest egg and the inevitability of the rand depreciating.”
So, what are the consequences of this unprecedented capital flight? Lightfoot — who “would love to be proved wrong” — predicts that within the next 24 months, revenue from tax collection will drop by 10 to 12 percent, that unemployment could reach 32 percent (up from the current 27 percent) and inflation potentially will double to 10 percent. The most recent budget raised the highest tax bracket from 41 percent to 45 percent — no small adjustment in a country where less than 5 percent of the labor force contributes more than 50 percent of the tax revenue. Experts forecast further tax hikes in February 2018 when the next budget is submitted to Parliament.
Given the country’s kleptocracy, administered prices such as electricity will continue to rise at unaffordable levels, and thanks to the weak rand, fuel prices will skyrocket. The reduced government income will put social grants in jeopardy and widespread social unrest will become a very real possibility.
After weeks spent searching for someone with a more positive outlook, I eventually find it in the office adjacent to Eskinazi’s. Gus Allen, a director at AlphaWealth, doesn’t think we’ve passed the point of no return. The nationwide picture is really dire, he says, but if you look carefully, there is quite a bit of light among the dark. “We’ve just had the biggest maize crop ever … in spite of a worm that nearly destroyed it,” he says, before pointing out that nontraditional sectors like blueberries, guavas and digital marketing are all surging. “Besides, all the big guys got their money offshore long ago,” he says knowingly.
One thing everyone can agree on is that Zuma, who’s already a lame-duck president, has to go. What remains to be seen is whether his successor, who will be chosen by the African National Congress in December, can reverse or, more realistically, slow the spiraling cycle of corruption and collusion that’s dismantling — vertebra by vertebra — the country’s political and economic backbone.
Regardless of what happens, rich South Africans will be just fine. It’s the man and the woman on the street — the ones without a plan B who are relying on blue-collar jobs and social grants to get by — who will really suffer.