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Why To Invest in South Africa: An Analysis of Investment Advantages, Prospects

South Africa: Africa’s Second Biggest Economy
South Africa Investment Opportunities (Image source: National Empowerment Fund)

The end of the apartheid era in 1994 brought many changes to South Africa and this too has been reflected on the economic front. Despite struggling for the early years, the rainbow nation made a significant leap forward in restoring order to an economy battered by years of international sanctions and domestic violence. Within two decades of national reconciliation and economic reconstruction, South Africa has turned to become Africa’s second largest economy and the most favored investment destination.

A soon as the first African National Congress (ANC) government was sworn in 1994, efforts to restore order to the economy shattered by sanctions began earnestly. Fiscal discipline and determined efforts help increase the economic capacity of people and build a strong edifice for eliciting growth. In 2000, the then President Thabo Mbeki took bold initiatives with stepped up governmental spending, more space to private players, liberalized policies and relaxation in labor law restrictions that attracted massive foreign investment and spur economic growth for a decade. The results were visible from 2004 onward with strong economic expansion and capital formation. South Africa experienced an average growth rate of approximately 5 per cent in real terms between 2004 and 2007.

The rapid and robust diversification of the domestic economy, liberal trade policy, strong fiscal discipline, friendly monetary policy, effective infrastructure in place and sizable English educated manpower make South Africa a leader among the developing economies. Political stability over the years and determined market, trade and labor reforms have contributed to its center stage position as one of the economic powerhouses not only in Africa, but also at the global stage. Johannesburg, the financial capital of the country, is home to Africa’s largest stock exchange. South Africa also has the most sophisticated banking and financial services sectors in the entire continent.

The country withered the global slowdown in the late 2000s with a “technically decline in growth” – a word used by Tito Mboweni, a former governor of South African Reserve Bank, to refer to minimal economic contraction. Compared to China, India and other emerging markets, South Africa struggled through the recession. The period 2008 to 2011 only recorded average growth just above 2 per cent,  largely attributed to the global economic recession. It picked up again led by private and public consumption growth in 2012, while export volumes and private investment grow steadily. However, the slowdown returned in 2014 only to be beaten back in 2015. The rebounding and recovery is not new for South African economy, which now steers the African dream and has become well integrated into the global economy.

Though there was a 15 percent fall in foreign investment in monetary terms, South Africa remained at the top of the list of destination countries in Africa measured by number of projects in 2014, according to a report from fDi Intelligence, a data division of the Financial Times group. This corresponds with 1.4 percent GDP growth last year, the lowest in the post-apartheid era. However, the 2015 first two quarters have witnessed visible changes with industrial action, domestic consumption, demand from trading partners, filling up of infrastructure gaps and new investment rates are on the positive side.

In 2015, the GDP is expected to cross $500 billion from $350 billion in 2014 and country’s foreign exchange reserves are already at $50 billion. Considered as an upper-middle economy along with Mauritius, South Africa accounts for almost a quarter of Africa’s gross domestic product in terms of purchasing power parity. The GDP per capita in South Africa in 2014 was $6086, highest in Africa after tiny Equatorial Guinea, Seychelles, Mauritius and sparsely populated Botswana. The national government has a tax revenue income of about $80 billion (2014), the highest in Africa, and 45 percent debt to GDP ratio, one of the lowest compared to the developed and developing economies.

The foreign direct investment in South Africa has increased by an impressive 86% in the past two decades. New investments in infrastructure and significant focus on spatial development at the local, regional and national levels, including development corridors, improvements in service delivery and decentralization of policies backed by determined implementation have opened new avenues that assure foreign investors in terms of strong growth, participation, business freedom and return. The largely free-market economy of Africa backed by democratic credentials and a transparent regulatory framework, a large population, access to raw materials and political stability opens up new vistas of opportunities for foreign investment in both the public and private sectors.

Comparison With Other Developing Countries

The 2014 UNCTAD World Investment Report acknowledges that “South Africa holds a potential stronger appeal to foreign investors than any other countries in the world.” With the African continent is now widely acknowledged as the next growth frontier, SA is in the fortunate position of having identified the growth opportunities in Africa many years ago already. Though South Africa remained the most popular country in Africa for FDI, the inflow is yet to tap its true potential. 
South Africa Investment Prospects (Image: Gardenroute.com)


There are a number of areas where South Africa scores over developing African and non-African economies as lucrative destination for foreign investors.


Strong Fundamentals

South Africa’s unique selling point lies in the country becoming a unique combination of a highly developed first-world economic infrastructure and a huge emergent market economy providing ample scope for strong entrepreneurial and dynamic investment environment. It has achieved political and macro-economic stability, two key concerns in many developing markets. Controlled fiscal deficit, high revenue generation and low debt-to-GDP ratio enable the government to increase expenditure on social services and infrastructure and reduce the costs and risks for investors, fuelling enhanced investment and growth.

The UNDP Human Development Report 2013 cites increasingly important role of South Africa alongside China, India and Brazil in the 21st century. This underlines significant successes in ensuring macro-economic stability achieved over the years through the implementation of policies directed at promoting domestic competitiveness, long-term socioeconomic vision, growth and employment. The biggest strength of South Africa lies in its government policies, from the National Development Plan to the National Infrastructure Plan, making a clear disposition before the world inviting business owners and investors while upholding solid and trusted fundamentals. Continued governmental support for the country's global and regional growth aspirations along with “robust governance, strong auditing and a developed legal system" position South Africa strongly among the developing countries.


Robust Domestic Base

The huge depository of natural resources and a large domestic market make South Africa a promising opportunity for economic freedom–led growth. Notwithstanding the fall in FDI in the wake of global slowdown in the last few years, SA remained among the top three most lucrative destinations in Africa for FDI. According to a recent report by McKinsey, “five priority sectors that could help boost economic growth significantly and increase employment opportunities in the country are advanced manufacturing, infrastructure, natural gas, service exports, and agro-processing.” The report highlights a potential combined addition of $87 billion to GDP from these five sectors by 2030.


South Africa is the undisputed leader of Africa with a contribution of 40 percent of the continent’s industrial output, 50 percent of electricity and 45 percent of minerals. Despite a negligible 2 percent contribution to the national GDP, the agriculture sector of the country is among the top 20 most productive countries in the world. South Africa, which has the fifth largest mining industry in the world, is the biggest producer of platinum, 6th biggest in gold and coal and 9th in wool production. It also has sizeable reserves of iron ore, manganese and chromites. While the country is 28th in numbers of car produced every year, it is at 18th place in terms of cars sold. South Africa produces about 40 percent of known resources available in the world.

The working age group amounts to 65 percent of the population and the services sector contribute to about 65 percent of the GDP followed by industry at 32 percent. South Africa is ranked 24th and 41st respectively in the Economist’s Largest Gold Reserves Index and Biggest Exporters Index.  It has the fastest growing tourist-industry in the world currently accounting for 12 % of the GDP. The World Economic Forum's Travel and Tourism Index lists the country on 29th position due policies conducive to the sector's development and good assessment of infrastructure. Above all, it is both a contributor to and beneficiary of seamless global economic integration.


Ease of Doing Business

South Africa has one of the most business-friendly and liberalized environment in terms of economic interaction, trade, investment and rehabilitation of financially distressed companies. The country has consistently been ranked in critical areas of national competency by key indices, such as the World Economic Forum Global Competitiveness Report, the World Bank Ease of Doing Business Index, the World Economic Forum Travel and Tourism Index. This is an indication of the preeminent position “Brand South Africa” has secured, global perception of it as a reliable and attractive investment destination and national ability to outperform other developing economies. The national financial sector is recognized as a top global performer in the most recent Global Competitiveness Index released at the World Economic Forum.

Even among the BRIC countries, South Africa leads in six of 10 criteria for ease of doing business, according to the 2013 World Bank Ease of Doing Business Index. These are starting a business, protection of investors, ease of getting credit, construction permits and payment of taxes. The 2015 index acknowledges policy changes in the last two years allowing greater labor freedom, fiscal freedom, trade freedom, and freedom from corruption. It also highlights South Africa’s initiatives to decrease the time, cost, and red tape business have to deal with to get products to port and shipped to international markets.

The country has an economic freedom score of 62.6, highest in Africa. While the government has withdrawn price controls over most of the items, labor laws are not strictly enforced. It requires just 19 days and five procedures to launch a company in South Africa. There is no requirement for minimum capital and need to reserve a company name. Electronic filing and less transfer duty make property transactions fast and less costly. The country is ranked 23rd out of 81 countries in the Jones Lang LaSalle's "World's most Transparent Real Estate Markets" ahead of all its BRIC partners.


Location Advantage South Africa (Image source: AtlantaBlackstar)

The national government also offers various incentives in terms of protection, no restrictions on the form or the extent of foreign investment, simple tax rules, 15 percent foreign investment grant, protection of intellectual rights, skill support financing up to 50 percent, tax allowances for strategic industrial projects, tax-free grants critical infrastructure facilities, and much more.

Geographical Advantage

The geographical location of South Africa also holds many lucrative possibilities for investors. It acts as a door to Africa and a link between the east and west. The country has positioned itself as the fulcrum of African revival. Stability, tranquility and security along with pre-existing business friendly environment make South Africa a door for many investors to have a share in the economy of other African countries. This has been particularly beneficial for home-grown multinationals which have made an investment exceeding $6.9 billion in 2014, a 4.3 percent increase compared with 2013, more prominently in retail, telecom, mining, services and manufacturing, outside of national borders, mostly in other African economies.

South Africa financial and technology giants are also at the forefront of investment in Africa. A big chunk of agricultural, mining, energy and other products are consumed by fellow African countries. Its banks are the biggest source of credit for businesses in Sub-Saharan Africa. As Nigeria and most of North Africa fight to emerge from chaos and violence and many in the sub-Saharan region seriously lacking on the infrastructure front, the country offers an attractive choice for foreign businesses looking for the realization of their African dreams.

The country is perfectly placed to become the center stage of trade between emerging markets of Asia, Africa and Latin America. Port Elizabeth, Cape Town, Durban and East London can be launch pads for these markets inviting investors to make the most of lucrative possibilities, wealth of natural resources and huge export and import opportunities, developed infrastructures, tax and customs reduction and a reasonably competitive domestic economy that exist in the country. 


 

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