South Africa seems like an attractive place to do business, but alongside the opportunities, there are risks.
Market analysts are upbeat about the country’s macro economic policies, central bank, local capital markets – the Johannesburg Stock Exchange is one of the world’s 10 largest – and political stability. In general, South Africa offers a business-positive culture. However, there are business risks for foreign investors and may account for the sluggishness with which foreign direct investment has found its way into the country post-Apartheid.
Exchange rate volatility presents particular uncertainties. At R11 to the US dollar in late 2001 – roughly R16 to £1 – South African business assets, property, labour costs and local tourism looked cheap. At the current level of R6 to the dollar – R11 to £1 – much less so. What is unclear, given there was no overpowering economic reason for the rand to appreciate so sharply, is why it happened.
Paris-based OECD suggests it might have been driven by “a surge of offshore transactions in rand derivatives (especially swaps)”. The exchange rate still presents a risk.
Although a significant step forward in telecoms deregulation is set to take place from February, this will not happen overnight. In addition, there is still an Africa premium on IT, both in capital cost and buying in IT expertise due to a skills shortage.
As with all emerging markets, there may also be a continuing risk of corruption. According to research by Germany’s University of Passau and Transparency International, South Africa scores 4.6 on its Corruption Perception Index, compared with top-ranked Finland at 9.7 and bottom-placed Haiti at 1.7. It puts South Africa in 44th place out of 149 countries, on a par with Lithuania and Kuwait, and just a notch below Italy.
The biggest risks, though, are those arising from social conditions. As many as five million people out of a total population of 45 million are suffering with HIV/Aids. There is a high level of violence in the country’s major cities, and most buildings are protected by stringent security.
Unemployment is running at 35% – the bulk of which is in the black community – and many are hard to employ because of low skill levels. Adult literacy has been achieved by 84% of the population and, at the same time, there is a brain drain of skilled and educated – predominantly white – people going overseas.
Having reassessed the situation 10 years after the first post-Apartheid elections, the government recognised that the rate at which historically disadvantaged individuals – people of colour, women, the disabled – are included in the workforce is too slow. The result is legislation that forces businesses with more than 50 employees to hire staff that better reflect the makeup of the society.
This level of social engineering is a real factor in today’s South Africa and is generally supported by major businesses. For interested foreign businesses, however, it represents a management consideration.
Likewise, the steady reform of land rights and the transfer of capital to previously disadvantaged South Africans is happening on a consensual, peaceful basis.
Download our Whitepapers
There are those among the white business community in South Africa who question what the future holds. This is also true of people of colour, who previously were not white enough to be on the right side of the tracks and are now not black enough.
“We must manage diversity,” says Ebrahim Rasool, a senior member of the ruling African National Congress. “We must adhere to the principle of having redress for the past, which was unsustainable both morally and economically.
“The country is going through a transition from the Mandela era, which established the feel-good factor, to that of Thambo Mbeki, who is striving to build a well-run country.”
South Africa is probably the most attractive business destination in Africa and keen to attract world attention. But it will have to make its case on the world stage if it is to attract much-needed investment.