Tax relief could help industry recover, hears HyperMobility Conference

The South African economy is only in late 2024 or 2025 expected to get back to the same level it was in 2019, says Absa chief economist Jeff Gable.

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“The economic shock to the global economy is the largest since the Great Depression in the early 1930 and the same thing is true here in South Africa.

“The economic challenge is vastly larger than we have ever seen. The impact of COVID-19 is substantial and is going to be long lasting,” he told the HyperMobility virtual conference organised by Messe Frankfurt South Africa and Naamsa on Wednesday.

Gable says that data from Google Mobility that taps into people’s movements suggested that a quarter or more of people who used to travel to work places each day are not doing so now.

“That will have some implications for vehicle markets and other types of consumer spend.

Gable added that the catering and accommodation, construction and motor trade sectors are all expected to contract by more than 20% in 2020, with only the telecoms and agriculture sectors expected to show year-on-year growth compared to 2019.

He says that there was an expectation that job losses will stop as soon as people go back to work but their expectation is that, on aggregate, the economy will continue to shed jobs for several more years.

According to Gable, 1-million jobs were lost in the global financial crisis in 2009 and some data suggests more than 1-million jobs have already been lost in South Africa.

If 1-milion formal sector jobs are lost because of the pandemic, about R80 billion in consumer spending will disappear based on the average median wage, with the loss in consumer spending increasing to R300 billion based on the average wage, he says.

Gable says further that investment is necessary for the economy to grow going forward but any recovery in the economy will be private sector led because of the poor state of government finances. In the same way that businesses only invest when they feel confident, households will tend only to spend discretionary income if they feel more confident.

Gable notes that large discretionary expenditure is associated with the vehicle industry but consumer confidence is very weak.

“For the first significant time since the mid-1990s, wealthier households in South Africa say they are worried about their financial position. You can have significant incentive programmes, interest rates that are at 50-year lows but at the end of the day, a big ticket purchase - something like a vehicle - is also a high confidence purchase."

National Association of Automobile Manufacturers of South Africa (Naamsa) vice president and MD of Ford South Africa and Sub Saharan Africa Neale Hill said an optimistic economic forecast is for a V-shaped recovery globally and for South Africa from COVID-19 and new vehicle sales to rebound sharply from the extreme lows recorded in 2020.

However, expectations are for the new vehicle market to only achieve the pre-COVID-19 market level by 2022 and onwards, he said.

Hill said new vehicles sales declined by 33.4% in the first nine months of 2020 compared to the same period in 2019 while vehicle exports declined by a massive 37.5% in the same period.

“As a result of the COVID-19 impact, projections are now for a 30% decline in overall new vehicle market sales - 10 times more than the initial projection - while vehicle exports and subsequent vehicle production is also anticipated to decline by about 30%.

“New vehicle sales are a leading indicator of economic vitality for many modern economies and also South Africa. The pandemic unfortunately deepened our already existing economic recession - and 2020 is already the worst new vehicle market in South Africa in 10 years,” he says.

Hill stressed a recovery in the new vehicle market will depend on how quickly the economy can break out of its low growth trap and how soon society will recover from the present lockdown.

He says Naamsa recently commissioned a study to investigate and make recommendations on how best South Africa can stimulate demand for new vehicles sales to negate the severe impact of the pandemic on new vehicles sales, production and the entire automotive value chain.

The findings of this study indicated that 14 countries around the world were providing no support to the automotive industry to mitigate against the impact of COVID-19, only one country was in the process of instituting a general demand stimulus programme while six countries - China, Germany, Spain, France, Russia and Indonesia - were instituting automotive specific demand support.

Hill said recommendations by B&M Analysts focused primarily on light vehicle stimulus interventions that are fiscally neutral and they only considered tax based support mechanisms and an amendment to the treatment of VAT as part of the leasing options.

“On the tax front, the removal of the CO2 tax will have a limited effect on emission without any changes in fuel quality. So this is a good tax to temporarily discontinue.

“Based on our modeling of the government’s net fiscal position, this would improve by R1 billion, with the industry benefiting from an additional 11 756 units of sales. An ad valorem tax reduction will have the most significant impact, given price elasticity in the market.

“Based on our modeling, the government’s net fiscal position based on a reduction of the ad valorem rate from 0.0003 to 0.000022 would remain unchanged, with the industry benefiting from an additional 16 635 units of sales.

“The removal of the upfront payment or capitalisation of VAT for private lease finance agreement would allow for the monthly payment of VAT as per rental agreements, which would attract more private purchasing through leasing,” he says.

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