March 2010, No. 55

Special Report

South Africa

The Rainbow Nation

South Africa often referred to as the rainbow nation due to its diversity, is a stable and maturing democracy rich in history and culture.

South Africa borders on the Atlantic and Indian oceans to the west, south and east, and shares po­litical boundaries with Namibia (to the northwest), Botswana and Zimbabwe (to the north) and Mozambique and Swaziland (to the north east). It comprises the south­ern end of the African, continent from 220 to 350 south and from 170 to 330 east. Enclosed within South Africa’s southeast is the kingdom of Lesotho and nearly 2,000 km southeast of Cape Town are Prince Edward and Marion islands.

Two currents wash the South African coastline, the cold Benguela coming up from the Antarctic and the warm Agulhas down towards the southern tip of Africa. The regular coastline and few Days mean that Saldanha on the west coast, where the coun­try’s fishing industry is centered, is the only ideal natural harbour - though lack of water sources and access to the hinterland rendered it of lesser importance. South Africa has no navigable rivers and only the two largest, the Limpopo and the Orange, have permanent, extended watercourses. The only natural river harbour is at East London in the Eastern Cape.

The plateau in the interior and the area between the plateau and the coast are the two main features of the country’s landscape. They are divided by the great escarpment which reaches 1500m in the southwest and nearly 3500m in the Drakensberg in the east. The plateau consists of mainly plains with an average altitude of 1200m. The coastal strip comprises plateau slopes to both east and west and the Cape folded belt to the south.

South Africa’s average rainfall is far less than the global average of 860mm. Nearly two thirds of the country, mainly to the west barely satisfies the mini­mum required for dry-land farming, though the areas to the northeast are relatively lush. Most of the country has much of its rainfall in the summer months, apart from the extreme southwest around Cape Town, where its Mediterranean climate means most of the rain comes in winter. Droughts regularly plague the country, sometimes followed by floods.

The country is generally and on average warmer to the east, especially along the coast and as a result of the Agulilas current, though on the whole the altitude of the plateau keeps the interior cooler than one would expect of a subtropical zone of similar latitude. This is especially true as the land rises into the northeast towards the tropic of Capricorn.

Currency: Rand (R1=100 cents)

Global companies with South African connections: Anglo Ameri­can, BHP Billiton, De Beers, First Rand, MTN, Naspers, Old Mutual, SABMiller, Standard Bank, Sasol, Sanlam, Telkom.

Multinationals with major operations in South Africa: Acer, Bar­clays, BMW, Cisco Systems, Coca-Cola, EDS Corp, Hertz, Levi Strauss, Mercedes-Benz, Microsoft, Mitlal, Pepsi, Tata, Toyota, Vodafone.

South Africa’s economy during the colonial period was dominated by ag­riculture and later mining. The first Dutch settlement at the Cape in 1652 was established as a halfway provisioning stop for ships en route to the East Indies. Mining of gold and other rare, precious and useful metals dominated the economy of the twentieth century and this was augmented by ancil­lary manufacturing industries as the economy matured, Today the tertiary or service sector predominates, providing close to three quarters of GOP and employment.

The government’s policy choices had to some extent shielded it from the global financial turmoil and that continued investment growth, particularly by the public sector; would aid the country in weathering the storm.

The South African government promotes broad-based black economic em­powerment for previously disadvantaged individuals and is in the process of implementing its Accelerated and Shared Growth Initiative for South Africa (AsgiSA). The plan prioritises certain fast-growing sectors that hold the po­tential to boost GOP growth and provide increased levels of employment. Articles on the following pages explore the economy, AsgiSA and incentives to do business in South Africa in greater detail.

Solid fundamentals, public infrastructure investment and sound policies are set to guide South Africa through the current global economic turbulence.

The business confidence of South African enterprises, as measured by the South African Chamber of Commerce and Industry’s (Sacci’s) Business Confidence Index (BCI), rose 2.5 points to 86.7 in November 2008 after falling 5.7 points in the previous month. The BCI had been in decline since the beginning of 2007, its fall exacerbated by stormy global financial markets. According to Sacci, the BCI would likely remain under pressure into 2009 as a result of the subsequent effects of financial turmoil around the world.

South Africa’s International Investment Council which advises the presi­dent on economic matters said in October 2008 that the country’s regula­tory environment and the government’s policy choices had to some extent shielded it from the global financial turmoil and that continued investment growth, particularly by the public sector, would aid the country in weather­ing the storm.

A report by the executive board of the International Monetary Fund (IMF), completed in the second quarter of 2008 and published in the third, echoed these sentiments, finding that South Africa had been able to make economic progress in the last years as a result of the country’s sound macroeconomic policies and transparent policy framework, and maintaining that South Africa’s economic fundamentals remained strong. While recent international market developments and the worsening eco­nomic outlook was placing pressure on the national economy, the IMF said that the country’s financial system was sound, well-capitalised and well-regulated; it advocated the increased use of public-private partner­ships to meet the government’s policy requirements of infrastructure developments and social spending. The IMF report also welcomed the fact that financial services in South Africa had become more accessible so that the “banked population” of the country had risen from 23% in 1994 to 63% in 2008.

South Africa’s average rainfall is far less than the global average of 860mm.

While South Africa’s economy grew at an average of nearly 5% between 2002 and the beginning of 2008, it dropped from a revised 5.1% in the sec­ond quarter of 2008 to 0.2% in the third (having been at 2.1% in the first), according to Statistics South Africa. This brings overall growth for the first three quarters of 2008 to 3.7% compared to the same period in 2001.

Growth in agricultural output by value and in construction activity rose sharply in the third quarter, by 16.1% and 15% respectively; but the three sectors that make up more than a third of the country’s GOP all contracted: mining by 8%, and manufacturing and wholesale and retail trade and hos­pitality by 6.9%.

Much of the economic growth South Africa has experienced this century is attributable to service sector growth, particularly in the finance and con­struction industries. Services contribute 74% to the country’s GDP and make up 72% of employment. Globally the services sector, at 10.1%, grew more man that in trade in goods between 2000 and 2001.

In November 2008 the MasterCard Worldwide Centre of Commerce Emerging Markets Index of 65 cities set to drive long-term economic growth in over 30 emerging markets listed Johannesburg, Cape Town and Durban at 11^th, 33^rd and 37^th  places respectively.

Between 2002 and 2008 investment in the country increased from 15% of GOP to more than 22%, Nedbank’s capital expenditure report, released in August 2008, showed that there were 80 new investments in South Africa valued at a total of R 336,1 billion announced in the first half of the year. This is a sharp increase over the same period last year and is mainly due to electricity utility Eskom’s capacity expansion program. In the private sector alone 64 new projects valued at R 72 billion were announced during tills period. R38 billion of this was in the finance and real estate sector and was accounted for by housing developments, and the construction of new and expansion of existing retail facilities. Investments worth R25 billion were announced in the manufacturing sector, up 67% year-on-year. However, in­vestments in mining and general government projects were down from the first half of 2007: they were valued at R6.5 billion and R34 billion (for 13 projects) respectively. In the latter category the largest project is the Moloto rail development corridor which is to provide an integrated transport link between Gauteng and Mpumalanga.

SAITICE: The following is an edited version of the address by Director General of the Department of Trade and Industry Tshediso Matona at the second annual South African International Trade and Investment Conference and Exhibition (SAITICE).

• The South African economy will continue to grow as it has done now for the longest period in recorded history.

Today the South African economy is stronger and more resilient than ever be­fore. Our economy grew by 5% in 2006 and 2007. Our growth rate range has increased from 2-3% a few years ago to the 4-5% range. Our aim is to push our growth rates to above 6% after 2010. However the perfect storm has meant that we had to readjust our growth projections. The revised estimate for 2008 is 3.7% and for 2009 is 3%, Our gross fixed capital formation rate has increased from 15% during 2000 to about 20% of GDP and the target is 25% by 2014.

The South African economy will continue to grow - although at lower rates through this period of turbulence - and in so doing address the developmental goals, namely, halving levels of unemployment and poverty alleviation. The government has committed capital expenditures to increase economic ef­ficiencies aimed at improving South Africa’s infrastructure and logistics networks. These will have the positive spin-off of promoting growth and labour-absorption in tradable and non-tradable sectors of our economy.

 Skills for the economy continue to be an area of concerted focus with the Joint Initiative for Priority Skills Acquisition (Jipsa) becoming a programme of the Department of Education. Equally critical is the roll-out of broadband information and communication technology (ICT) infrastructure as well mea­sures to achieve greater uptake and usage of ICT.

The National Industrial Policy Framework was adopted and it indicates that in the short to medium terms we will focus our efforts on lead sectors, namely:

• Capital/transport equipment (including competitive supplier development programmes) leveraging infrastructure

• Automotive assembly and components manufacture

• Chemicals, plastics fabrication and pharmaceuticals

• Forestry, pulp and paper and the furniture sector

• Agriculture and agro-processing

• Mining and minerals beneficiation

A combination of factors has pushed our economy to the point of being able to move from moderate levels of growth to high levels of growth. The effect of recent economic policies leading to a stable macroeconomic environment allows for a more expansionary approach. Even in this stage of global up­heaval, the pace of public spending is set to remain at about 6% real growth over the next three years which represents a fiscal stimulus.

Since 1994 macro economic policy has aimed to achieve low inflation, low budget deficit and reduce our foreign debt, which has resulted in our macro economic stability and has provided the State with sufficient resources to invest in growth. At the micro economic level, the approach is to expand and to diversify the manufacturing base and to further develop the industry.

Over the past few years we have been developing and supporting industrial growth through attracting new investments, offering incentives, providing tax rebates, and establishing industry development programmes. We have also been growing the small business sector, and promoting more equality and redress through our broad-based black economic empowerment (BBBEE) programmes. At the same time, we have made important gains in ensuring that our country has a more efficient business environment. According to the World Bank, South Africa ranked 35th in the world for the ease of doing business in 2008.

The South African government’s approach to developing the economy and macro-economic stability has yielded positive results - South Africa is cur­rently experiencing its longest period of sustained economic growth in over 50 years and now has a successful track record of managing the macro fundamentals of the economy well.

Our economic strategy has identified key sectors that need to be supported and it recognises that in order for South Africa to be successful we should be more export orientated, and in certain sectors we need to integrate into international supply chains.

One such sector where we have achieved significant results is in the manu­facturing sector, which has attracted significant investments. This has pro­vided confidence in government and the market to further consider growth in the dynamic industries sectors including aerospace technologies.

For many investors South Africa is seen as a gateway to the rest of Africa, particularly as South Africa has one of the best infrastructure and logistics mechanisms on the continent and with the improved infrastructure capabili­ties the volumes of trade between South Africa and the rest of Africa have expanded significantly in recent years.

Those looking to invest in South Africa should consider that:

• South Africa is one of the most sophisticated and promising emerging markets, offering a unique combination of highly developed first world economic infrastructure with a vibrant emerging market economy.

• South Africa has the largest economy on the African continent, accounting for approximately 25% of the continent’s GDP.

• South Africa remains the world’s top producer of minerals such as gold, platinum, rhodium, chrome, manganese and vanadium.

• South Africa holds 80% of global manganese reserves, 72% of chrome, 88% of platinum-group metals (PGMs), 40% of gold and 27% of vanadium.

• There are excellent opportunities in our expanding economy where investors will earn a high return on their investment. Two of the key reasons behind our strong performance are the growing competitiveness of South African industry, which has led to an increase in exports, and the growth in our domestic demand for goods and services.

• South Africa has a robust manufacturing sector with a wide variety of products and lots of expertise. Companies locating in South Africa will not only have the opportunity to source their inputs at very competitive prices but will often have a domestic market for their products and services.

• In addition, South Africa’s growing international presence has resulted in a number of favourable trade agreements with other countries, which has helped to facilitate the growth of South Africa’s export markets.

• South Africa has a progressive and effective legal system and the rule of law is important for South Africans. The country has a good foundation of legal precedents for all contractual issues and a competent judiciary should contractual disputes be taken to court. South Africa also has a strong set of corporate governance rules and work is being done to continually ensure that they are up to date and in line with international best practice.

• South Africa ranked 44^th out of 131 countries in the World Economic Forum’s Global Competitiveness Report 2007/08.

• South Africa was ranked the 18^th most attractive destination for Foreign Direct Investment by global strategic management consulting firm AT Kearney.

• South Africa has been relatively shielded from the global financial crisis due to a combination of factors, namely, exchange controls, regulatory controls, low levels of foreign debt and prudent approach to fiscal policy.

Of particular significance in laying the foundation for increased socio-eco­nomic activity, investment and job creation is South Africa’s huge public investment programme in infrastructure development - US$60 billion over the next three years.

This includes projects in electrification, water, rail, ports, airports and pe­troleum pipeline, Which will significantly reduce the costs of production and delivery, thereby increasing the country’s competitiveness. In addition to creating a platform for private sector investment, this programme itself opens up numerous opportunities for investment and collaboration with in­ternational partners.

Major additional investments have gone into stadiums and related infrastruc­ture as the country prepares for the 2010 FIFA World Cup. The honour to host one of the biggest events in the world sports calendar translates into significant growth opportunities for investors, both domestic and foreign.

As an open economy we welcome new investment and collaborative part­nerships in key areas of opportunity - all uniquely poised to deliver real com­petitive advantage. To this end, the DTI looks forward to facilitating mutually rewarding business relationships as we strive to enhance growth and enable our economy to meet its full potential.