South African retailers Woolworths, Massmart and Truworths International are sticking to their investment plans, believing the new president’s pledge to revive the economy will outweigh any hit to consumer spending from a hike in VAT sales tax.

The government announced last month it was taking the politically risky step of raising valued-added tax (VAT) for the first time in 25 years, part of efforts to cut the deficit and stabilise debt under new President Cyril Ramaphosa.

That increases the cost of living for consumers already struggling with high unemployment, a stagnant economy and high personal debt.

But with the country’s new leadership in place and promising to turn the economy around, Woolworths’ Chief Executive Ion Moir has said a return of confidence among consumers could outweigh the 1 percentage point rise in VAT to 15 per cent.

“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 per cent increase in VAT,” Moir told Reuters.

Moir’s optimism is backed 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 Country Road and David Jones chains.

Moir’s confidence was echoed by Guy Hayward, his counterpart at Wal-Mart’s South African unit Massmart.

“(The VAT hike) will be very slightly negative for a while and then it will settle down,” Hayward told Reuters. “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.”

Massmart, which sells electronics, groceries and building materials, plans to open 34 stores at home in the next three years, Hayward said.

The company, which reported a small increase in full-year last month, was among the better performing stocks on South Africa‘s general retail index, rising 8.81 per cent, while Woolworths gained 1.85 per cent.

Truworths, which competes with Woolworths in the clothing market, opened 25 stores across all brands in the 26-week period ended Dec.31, while its business was also boosted by the acquisition of a homeware chain, which added a further 13 stores.

“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,” Truworths International CEO Michael Mark told Reuters.

“Although the consumer will be negatively affected from higher taxes and levies in the near term, this should be more than offset from the potential for lower interest rates and improved consumer and business confidence,” said Bernard Drotschie, deputy chief investment officer at Standard Bank boutique asset manager Melville Douglas.

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