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UPDATE 2-Two top S.African retailers stick to plans despite VAT hike

* South African government raises VAT to 15 pct

* Retailers betting on consumer confidence

* Investments in South Africa still in place (Recasts throughout with VAT comments)

JOHANNESBURG, Feb 22 (Reuters) - South African retailers Woolworths and Massmart 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 on Wednesday 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 stabilize 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 said on Thursday a return of confidence among consumers could outweigh the 1 percentage point rise in VAT to 15 percent.

"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 percent increase in VAT," Moir told Reuters.

Moir's optimism is backed by a more than doubling in capital expenditure for 2018 to 3.8 billion rand ($326 million), although some of the money would be deployed in Australia, where Woolworths runs the Country Road and David Jones chains.

Woolworths, which sells groceries, food and homeware, did not specify what the money would be used for in a presentation of its half-year results, which showed a 15 percent drop in headline earnings per share and hefty writedowns.

POSITIVE FACTORS

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 profit on Thursday, was among the better performing stocks on South Africa's general retail index, rising 9.4 percent, while Woolworths gained 2 percent.

"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.

($1 = 11.6563 rand) (Addtional reporting by Tiisetso Motsoeneng; Editing by Gopakumar Warrier and Mark Potter)