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10Questions : Doing Business In South Africa « Back
September 2010
 
FW speaks with Simon Venables at PricewaterhouseCoopers about doing business in South Africa. >>



FW: What do foreign companies need to know about establishing operations in South Africa?

Venables: South Africa is an economy with a combination of emerging market and developed market components. Foreign inward investment is actively encouraged by the South African Government in order to boost our economy’s profile and support growth targets. The rules and regulations regarding foreign investment in South Africa are not considered onerous. Based on an annual survey contained in the World Bank and International finance corporations’ report ‘Doing Business 2010’, South Africa was ranked 34th out of 183 countries in the ‘ease of doing business’ category. South Africa also serves as a strategic and efficient springboard into other sub-Saharan markets.

FW: How would you describe economic conditions in the country over the last 12 months?

Venables:
The South African economy has rebounded from marginally negative GDP growth in 2009 to a growth rate of approximately 4.6 percent and 3.2 percent in the first and second quarters of 2010 respectively.  Manufacturing remains a key sector of the economy and real sales values were almost 9 percent higher at the end of June than a year ago. Most importantly, the country’s leading business cycle indicator has increased by 25 percent between March 2009 and May 2010. Retail sales have also firmly recovered from a low in the last quarter of 2009, recording real growth of more than 7 percent up to mid-2010. South Africa’s sovereign risk rating has risen steadily to investment grade status, and South Africa’s foreign exchange reserves have continued to reach new highs over the past five years, facilitated by a robust export performance and a net inflow of almost R 1 trillion on the financial account of the balance of payments since 2004. This factor is key to the strength of the SA Rand, which gained 37 percent against the US dollar between March 2009 and August 2010. Meanwhile, for the first time in 50 years South Africa had to cope with supply shortages from cement and electricity to beverages and petroleum. This situation arose from the relatively rapid structural improvement in the economic growth trajectory and has acted as an incentive for a surge in private sector capital formation. The government has committed more than R 1 trillion of fiscal resources to maintenance and upgrading of the country’s infrastructure over the next seven years. Finally, it is important to recognise that South Africa and Africa remain driven by markets. By 2030 Africa is forecast to be a larger market than China and India.

FW: Which sectors seem to be performing well and offering the best opportunities for businesses at the moment?

Venables: Considering the record-breaking performance and broad-based nature of investment in capital formation since 2003, most of the key sectors in the South African economy offer excellent prospects for sound returns. Between 2003 and 2007, investment in new productive capacity and infrastructure in South Africa expanded at an average rate of more than 12 percent per annum in real terms. A cherry-picking exercise would nevertheless single out mining, which stands to benefit from the swift and strong recovery of the commodity price cycle. From a mineral resources perspective, SADC still enjoys more than 40 percent of world reserves in chrome, platinum, manganese, diamonds, gold, cobalt and vanadium. A number of manufacturing sectors also stand to benefit from a combination of record-low interest rates and industrial policy incentives. The latter include motor vehicles and components, mineral beneficiation and chemicals. The tourism and hospitality sectors should also experience a structural enhancement of business activity, following the successful hosting of the Soccer World Cup finals. Investing in South Africa also acts as a springboard to business opportunities in one of the world’s largest latent consumer markets, with SADC boasting vast reserves of virtually the full spectrum of natural resources and a combined population of approximately 270 million people. According to current estimates by the demographic experts at the United National Development Programme, the SADC population should expand to more than 340 million within the next decade, making it the third largest regional population in the world.



FW: Are South Africa’s banks showing an appetite to lend, or is access to financing limited?


Venables: South Africa has one of the most sophisticated banking systems in the world and did not experience the same trauma as many more developed economies. Prudent lending practices contributed to this. Access to finance is improving in corporate and retail market and solid asset classes and sound business plans will be supported by the banks and lending institutions in South Africa. There is low appetite for lending in property development. Interest rates continue to remain low in South Africa.

FW: Could you give us a snapshot of activity on South Africa’s capital markets at the moment? How would you describe investor appetite, IPOs and other capital raising initiatives?

Venables: IPOs are influenced by the continuing turmoil in world economies, low employment levels and muted expected GDP growth and deflation threats. A strong pipeline for potential new IPOs in South Africa exists but is unlikely to materialise in the short term until the pricing gap between sellers and investors narrows. Having said that, several new IPOs did take place during the year, including Life Healthcare Group which raised R5.25bn and has a current market capitalisation of approximately R14bn. In Life Healthcare Group’s case, approximately 40 percent was subscribed by foreign investors, which is a major vote of confidence in the company, the healthcare sector and in South Africa by the international investment community.
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