The battle of wits

Advances in technology are linked to the evolution of cybercrime and crime syndicates, who stay abreast of these advances and change the way they operate in response.

Before the explosion of technology in its daily use by individuals, cheque fraud and manipulation were common. The movie Catch Me if You Can, starring Leonardo DiCaprio as a brilliant forger, whose skill at cheque fraud had netted him millions of dollars in stolen funds, is a good example of crime at the time. Today’s potential loot from victims of fraud on the internet is beyond comparison in size and impact.

In January 2024, Bob Dyachenko, owner of SecurityDiscovery.com, and a team of researchers from Cybernews discovered a data breach on an unsecured web instance of over 26 billion records. Interestingly it was found that Leak-Lookup, a data breach search engine, was the holder of the leaked dataset. “The dataset is extremely dangerous as threat actors could leverage the aggregated data for a wide range of attacks, including identity theft, sophisticated phishing schemes, targeted cyberattacks, and unauthorised access to personal and sensitive accounts,” the researchers said. This demonstrates how complex the issue of cybersecurity has become.

Privacy legislation, such as the POPI Act is meant to prevent unauthorised use of identities and private information, yet private information sits on multiple servers and hard drives that, with enough effort and astute access, can be copied. Municipal accounts, bank accounts, cloud storage of files on laptops or PCs, VISA or Mastercard account information, retail loyalty programmes with Pick n Pay or Shoprite, patient information stored by medical aids and home affairs ID information are all a target of professional hackers who are continually attempting to steal it.

The impact of cybercrime on the economy

According to Billy Petzer, research group leader: cyber security systems, at the Council for Scientific and Industrial Research (CSIR), the impact of cybercrime on the economy is estimated at R2.2bn per annum.

At corporate level, successful hacks can become very expensive, paralysing a company’s networks and data access. A WOW report on the information technology industry indicates that increased spending on cybersecurity solutions represents a growing opportunity for providers of IT services. The report referred to a February 2023 survey of 163 IT and security professionals by cybersecurity consultant Artic Wolf undertaken for ITWeb, which revealed that 74% of respondents said that their cybersecurity budget for 2023 would increase. Altron reported in the year to end-February 2023 that small to medium size companies that are listed as a vendor for a major enterprise supply chain may need to meet the cybersecurity standards of the enterprise to comply with vendor security requirements.

What can be done to counter the sophisticated growing industry?

Today, half of all the personal information of individuals, including bank account numbers South African Social Security Agency (SASSA) pay-out information and passwords, are stored on their mobile phone, an item that is purposefully targeted by thieves.

Some data or information is unavoidably necessary to function in society, and cell phones have become instrumental in transaction security checks. Everybody has a debit or credit card linked to a bank account and other accounts, home loans, car loans, investments etc. How do we shop without a card? To store all one’s data on a hard drive or keep it in a safe and only do cash transactions has become impossible. Woolworths will no longer accept cash for a coffee as cards and digital tools become the norm.

Online payments request all your card detail information without signature or other physical intervention. Payment systems get hacked, and recipient cell numbers get altered with painful consequences.

Relentless crime warriors are helping with cybersecurity

Cybersecurity has become a battleground of cybercrime syndicates and advancing technologies by software developers.

It has become an elaborate and intricate web of controls and checks to keep predators at bay. The relentless software updates even by the likes of Microsoft, Apple and Samsung to plug “vulnerabilities” demonstrate that the sophistication of cybersecurity defences is ever evolving.

To find out more about this growing industry and sector, purchase WOW’s full report on the IT industry in South Africa.

Why cigarettes are highly regulated

Cigarettes are highly regulated in South Africa and fall under the umbrella of items subject to sin taxes. This is due to their addictive nature and the complexity of safeguarding public health, aided by health warnings that smoking is bad and dangerous for your health.

Tackling the issue of illicit cigarettes in South Africa requires a comprehensive approach by various stakeholders including government agencies, lawmakers, and industry stakeholders by sharing resources and information to effectively combat the scourge.

The price difference between legal and illicit cigarettes will always be tempting for shady operators who rob the government of a significant amount of tax. Tax makes legal cigarettes expensive, and fighting the lucrative illicit trade adds to costs of legal cigarettes.

The rise of illicit cigarette trading

The five-month long ban on selling cigarettes in South Africa during the pandemic triggered unintended consequences of serious proportions. In the absence of cigarettes from tobacconists and retailers, some smokers desperately searching for cigarettes managed to find them on the black market.

This became an incredible boon to illicit cigarette peddlers who built a vast under the table distribution network, sustained beyond the lifting of the ban as smokers discovered how easy and a lot less expensive it is to buy cigarettes at a much lower cost.

The WOW report on the Tobacco industry in South Africa indicates that illicit trade took off from 2010, about the same time that new South African manufacturers sought to take advantage of the high prices for cigarettes charged by British American Tobacco South Africa (BAT SA), Japan tobacco International (JTI) and Philip Morris. In 2010, the illicit economy was for the first time estimated to be as high as 10% of the total market. By 2018, studies on the illicit market by Ipsos found it accounted more than 33% and was dominated by Gold Leaf Tobacco’s Remington Gold brand. The market share of illicitly sold cigarettes increased during the five months ban in 2020, and it was estimated that the share of illicit cigarettes had grown to between 54% and 60% of the market by 2022. BATSA’s loss of market share saw it reduce tobacco orders by 12.5% in 2021. BATSA has also on previous occasions said it considered closing its South African factory and considered sourcing processed tobacco from overseas rather than locally from Limpopo Tobacco Processors.

How the cost of living is driving the illicit trading of cigarettes

The government cannot rely on a moral barrier to stop buying cheap illicit cigarettes over expensive legal cigarettes. The price difference amounts to taxes, but the cognitive dissonance of buying illicit cigarettes is low to non-existent. Consumers are battling to make ends meet and find the solace of cheaper cigarettes acceptable even if borderline illegal.

Once the can of worms has been opened, it has become nigh impossible to re-can those worms, and the biggest loser is the government.

The impact of illicit trading of cigarettes on multinationals

Understandably, BAT joined forces with government to push back against the illicit cigarette trade, and is frustrated by the lack of progress, as this comes on top of continued and increasing measures to make legal cigarette trade and consumption more difficult. Not surprisingly, BAT’s workforce is down by a third, as if you sell less, you produce less and therefore require less manpower. Some of that workforce shifted to the illicit cigarette manufacturers, which pay much less taxes, if at all. The loss to the economy and employment is not in the main caused by the identity of the manufacturer but by the restrictions on and lower consumption of cigarettes.

It has become a real catch-22 situation for the government which probably will cut its nose to spite its face and continue to increase sin taxes on cigarettes in the Budget, which will inevitably drive more people towards the illicit cigarette trade.

While there seems to be progress to stub out the illicit trading of cigarettes, the resilience of this trade presents complex dynamics of taxation, public health, and economic repercussions. The resilience of the illicit market poses a formidable threat, demanding urgent and collaborative intervention by all stakeholders concerned.

African Continental Free Trade Area (AfCFTA) secretary general, Wamkele Mene, announced at the recent World Economic Forum in Davos that a further 31 African countries have implemented the agreement, joining the existing seven. AfCFTA has a potential market of 1.3 billion people and should be fully operational by 2030, underscoring Africa’s potential to become a global powerhouse, not in my generation, but certainly in that of my grandchildren. If South Africa is to ride that trajectory, the hard work needs to start now.

The two graphs below reflect the top ten countries in terms of growth of imports and exports between South African and the continent in 2021 and 2022, and they indicate just how much work needs to be done. 

South African private sector FDI is already well established in Africa, as can be seen from the table below. The subsequent table shows FDI into South Africa by other African countries. These figures are extracted from the WOW database of 200,000 companies, with FDI defined as a 25% holding or more. 

Please note: The tables below are also available showing a breakdown by industry footprint. If that would be useful, please let me know and I will send them to you.

There are eight foreign trade teams attached to their South African-based embassies (six European, Botswana and Brazil) which use WOWEB to map the South African business landscape and identify trade opportunities for companies from their countries. This a practical example of the state assisting the private sector to promote the sale of their goods and services in foreign countries.

In contrast, it was reported by agricultural economist, Wandile Sihlobo, that countries within the South African Customs Union place bans on the import of South African agricultural products without communicating with the South African authorities. 

The recent partnering of the state and private sector to resolve self-inflicted problems in power generation, logistics and crime could be extended to an initiative to promote trade with our continental neighbours. The IMF recently projected 4.5% GDP growth for sub-Saharan Africa, with South Africa stumbling behind with less than 1%. If we are to realise our potential standing on the continent, there needs to be a commitment to creating a symbiotic relationship between the state and the private sector.  

The gradual relaxation of exchange controls in South Africa since the advent of democracy has allowed South African investors to invest in a much wider range of asset classes and equities on the global market, resulting in diversification, risk reduction and hedging opportunities. Before 1994, South African individuals and businesses were heavily restricted to invest on foreign stock exchanges and markets.

What are financial markets?

In the broad sense, financial markets encompass transactions where the underlying item is money.

Money has facilitated exchanges and investments, enabling the creation of financial markets as we know them today to the extent that financial markets have become indispensable in economies.

Most savings of individuals and businesses, especially long-term savings, are invested in the stock market via retirement and pension savings, and investments in unit trusts and ETFs (exchange traded funds). Those savings are redirected from life insurance companies provident fund schemes and various intermediaries into shares listed on the stock exchange, and marginally, in unlisted shares traded over the counter. Companies can raise capital on the stock exchange. All these activities in financial markets accrue to individual savings, which are the foundation of economic growth and wealth creation.

The JSE and its comparative performance

The main institution representing financial markets is the stock exchange. The Johannesburg Stock Exchange (JSE) is not the only exchange South Africans can invest in, and as the graph shows, other major markets, as illustrated here with the US, have done much better.

A comparison between the JSE and other financial markets in the table below indicates that there is opportunity for investors to diversify in currency and the range of options at their disposal. To reinforce the importance and benefits of diversification for South Africans, the table also shows the performance of the JSE in comparison to other exchanges.

The JSE has suffered from the underlying performance of the South African economy and performed much worse than its US competitors.

Institutional vs individual and retail investors

South African financial markets are heavily focused on large institutional investors and not individuals, and the value of retail investors is still underestimated.

• According to tructuredRetailProducts.com (Risk.net):  “Structured (investment) products in Belgium are a big deal. Although the country is around a sixth of the size of the United Kingdom and has only 10 million residents, the land of fine beer and chocolate punches above its weight with sales higher than the UK market’s estimated €8bn” … referring to sales to the “Belgian dentist”, who typifies the well-to-do private investor.
• Shanks Group, a waste management company, said it had raised €100m (£63m) through the issue of a bond sold exclusively to private investors in Belgium, according to The Times UK, and it became the first British company to tap into the “Belgian dentist”.

For South Africa to tap into this retail investor segment, there needs to be better access to information and competitive fee structures. The discrepancy between freely available stock exchange and investment product information provided by the JSE and competing (international) financial markets, is concerning. Today, instant online information is what investors want and get from overseas markets.

Warren Buffett is often quoted saying that retail investors should focus on the cost of their investments as a major input to their investment decision-making. Yet, only recently have some financial intermediaries begun to offer free trading accounts, and still only for a limited number of equities.

Conclusion

The gradual easing of exchange controls in South Africa has expanded investment opportunities, fostering diversification and risk management. Financial markets play a pivotal role in driving economic growth and wealth creation. However, there is a need for South Africa to tap into the potential of retail investors by improving access to information and introducing competitive fee structures for individual investors. This calls for innovative strategies in the financial services sector to better serve retail investors and diversify from a focus on institutional investors.

For a deep dive into this industry, purchase the full report on the administration of financial markets.