The Report: South Africa 2014

Economy

South Africa’s economy has come a long way since apartheid ended 20 years ago, with significant improvements in both productivity and capacity – and a GDP that is now 2.5 times larger – but domestic and exogenous pressures have taken their toll on GDP growth. Headline GDP grew by 1.9% in 2013, although its components fluctuated considerably in synch with labour unrest. Although strong by comparison to many members of the OECD – particularly the eurozone – GDP performance in 2013 was nonetheless the third-worst since the end of apartheid in 1994. The turbulence is expected to continue over the short term, although 2015 should show a stronger recovery. South Africa continues to benefit from a number of comparative advantages, such as a robust financial services industry, a strong private sector and well-maintained infrastructure, but with regular strikes, twin deficits and high levels of unemployment, the country’s performance since the onset of the global financial crisis has been lacklustre.

This chapter contains interviews with Nhlanhla Nene, Minister of Finance; Rob Davies, Minister of Trade and Industry; and S’dumo Dlamini, President, Congress of South African Trade Unions; and a viewpoint from Clem Sunter, Scenario Planner and former Chairman of Gold and Uranium Division, Anglo American.

Banking

With both performance and assets outstripping the continent’s other large emerging markets in Egypt, Nigeria and Morocco, South Africa’s banking sector is the biggest and most developed on the continent. The economy has been shaken by the global financial crisis: the rand has seen unusual volatility, and demand from key markets in Europe and Asia has dropped. However, the country’s banks have been well buffered, and oversight is robust, with South Africa regularly ranking at the top of global tables for the quality of its regulatory framework. Bank margins were still strong in 2013 and were boosted by higher dollar lending across the continent, as banks hedged to prepare for the increasing interest rate cycle. Bank sector assets rose 9% year-on-year and almost broke the $378.8bn level at the end of 2013, representing more than half of total financial services industry assets. South Africa’s banks have shown resilience through economic and cyclical challenges and are expected to keep widening their footprint on the continent in the next few years.

This chapter contains interviews with Gill Marcus, Governor, South African Reserve Bank; and Jim Cowles, CEO for Europe, Middle East & Africa, Citigroup.

Capital Markets

The trillion-dollar market capitalisation of the Johannesburg Stock Exchange (JSE) makes the country’s bourse the 19th-largest exchange worldwide. South Africa has one of the highest equity capitalisation-to-GDP ratios globally, a unique phenomenon by international standards. The country’s capital markets have performed exceedingly well in recent years, in contrast to broader macroeconomic turbulence. Economic growth for 2013, for example, was 1.9%, compared to an equity market that grew by 21.4%. Despite the challenging economic outlook, the JSE is expected to continue to perform well. Equity markets should receive a boost through infrastructure improvements and market conditions like private equity exits, and private equity is set to see strong growth as institutions have not reached their full investment potential. On the bonds and financial derivatives side, the array of products is set to expand, with Islamic debt having made its debut.

This chapter contains interviews with Nonkululeko Nyembezi-Heita, Chairman, Johannesburg Stock Exchange; Stephen van Coller, Chief Executive of Corporate and Investment Banking, Barclays Africa; and Elias Masilela, Former CEO, Public Investment Corporation.

Insurance

Across the African continent, South Africa accounts for 80% of all insurance premiums. The market is heavily tilted towards life products, which make up four-fifths of the industry’s premiums, with earnings in the segment 10 times that of non-life in 2013. At year-end 2013, South Africa’s life insurance industry had $189.4bn in assets under management, with the segment’s top five firms showing signs of growth across the board that year. Penetration rates continue to rise: the number of formally insured South Africans grew from 6.2m people in 2012 to 7.8m in 2013. While the life insurance segment saw a strong performance in 2013, non-life growth was tempered by high claims. Strong investment market performance in the last two years has boosted insurers, but a stalling economy presents challenges in the near term.

This chapter contains an interview with Barry Scott, CEO, South African Insurance Association.

Mining

South Africa’s mining industry is the fifth largest in the world and the country has around 80% of global platinum reserves, 11% of gold reserves, and some of the largest supplies of chrome ore and manganese. The sector’s contribution to GDP has, however, been on a steady decline, falling to just under 5% in 2013 from 11% two decades earlier. Reversing this trend is a top government priority, considering mining’s importance to employment and foreign exchange earnings. Although domestic output is showing signs of a cyclical contraction, with reserves estimated to be worth $2.5trn, there remains plenty of wealth underground to still be reached. Much of this is being unlocked via advanced extraction technologies but is still awaiting new and upgraded transportation and power infrastructure to come on-stream. South Africa should retain its position as a global mining powerhouse, as few can match its sheer size and variety of reserves.

This chapter contains interview with Ngoako Ramatlhodi, Minister of Mineral Resources; and Neal Froneman, CEO, Sibanye Gold.

Industry & Retail

Manufacturing constitutes South Africa’s second-largest economic sector and currently accounts for 15.2% of GDP, as well as being responsible for the creation of roughly 1.7m jobs. It also ranks among the top three sectors in terms of multiplier effect. The sector’s contribution to GDP has, however, been steadily declining over the past three decades, having accounted for 19% of GDP in 1990 and 21.8% in 1980. Indeed, this is part of a broader shift with the tertiary sector. While the industrial sector has navigated through the global slowdown, it remains under duress. Many of the constraints plaguing the sector are not unique to the country, and are even more pronounced elsewhere on the continent.

Home to one of the continent’s most sophisticated retail markets, South Africa boasts a wide variety of retail formats and distribution channels to match the diversity of the country itself. The retail sector has played an important role in helping South Africa rebound from the 2008-09 financial crisis relatively unscathed, as social grants, increases in public sector employment and rising real wages contributed to higher household disposable incomes and encouraged spending. However, recent years have proven somewhat more difficult, with retail sales over the course of 2014 increasing by around 2% over the same period a year prior, compared with year-on-year increases that averaged over 5% between 2004 and the end of 2013. Nevertheless, a number of the largest local retail groups have a footprint that extends well outside of the country to markets in West and East Africa, as well as closer to home – which is helping to buffer balance sheets against the slowdown in domestic sales.

This chapter contains interviews with Johan van Zyl, CEO, Toyota Africa; and Gareth Ackerman, Chairman, Pick n Pay.

Energy

The government has pledged to increase exploration for gas in the National Development Plan and promulgated a 20-year Integrated Resource Plan to diversify the energy mix by boosting nuclear, natural gas and renewable power generation capacities. With an estimated 3.5% of global coal reserves, South Africa has traditionally benefitted from an ample supply of cheap fuel. It has the fifth-most energy-intensive economy in the world, accounting for 30% of total power consumption in Africa. South Africa generates 94% of its electricity from coal. The Department of Energy expects to reach the National Development Plan target of universal electricity access by 2025, five years ahead of schedule. Although it has one of the largest, most developed energy sectors on the continent, after three years of less-than-expected economic growth and tight capacity margins, South Africa is again reformulating its 20-year plan in a bid to address long-term energy security, equity of access to electricity and environmental sustainability.

This chapter contains interviews with Nosizwe Nokwe-Macamo, Group CEO, PetroSA; and Eddie O’Connor, CEO, Mainstream Renewable Power.

Transport

South Africa is home to the farthest-reaching and highest-quality transport network on the African continent. For decades the country’s extensive road, air, rail and sea links have underpinned economic and social development not only in the domestic market but through the region as a whole. In recent years the government has made a concerted effort to shore up South Africa’s infrastructure and connectivity, establishing a handful of large-scale, long-term capital investment programmes, including the 2012 National Infrastructure Plan (NIP), under which the state plans to spend $407.2bn on new and upgraded infrastructure across the transport, energy, water, sanitation, health and education sectors over a 15-year period. Major transport projects include a $1.54bn initiative to revitalise the country’s rail network and a $1.4bn plan to update and expand provincial bus lines. The rapid pace of investment and development in recent years is widely considered to be a reflection of both the sector’s many strengths and long-term potential for continued growth.

This chapter contains interviews with Nazir Alli, CEO, South African National Roads Agency Limited; and Monwabisi Kalawe, CEO, South African Airways.

Construction & Real Estate

The construction sector benefits from strong fundamentals but has grappled recently with a slowdown in big-ticket infrastructure work and falling margins, prompting some firms to focus their efforts outside of their home turf. However, this has helped to stoke growth in smaller and newly established contractors. While significant infrastructure spending has been planned for the medium term, order books, while busy, have yet to provide the dramatic rebound that has been hoped for. Despite the lingering uncertainty, there are signs that momentum is swinging in a positive direction. A number of state-owned enterprises, for example, are beginning to implement and break ground on projects that for years have stalled at the discussion and planning phase.

South Africa’s property market appears to be in a healthy place, demonstrating solid if not necessarily exceptional growth. However, there are exogenous pressures that could hamper demand, including a sluggish economy, eroding business and consumer confidence, escalating running rates, in addition to interest rate hikes, but these could serve as factors that will keep growth in check and temper the market from becoming over-exuberant. The scope for potential growth varies, unsurprisingly, but broadly speaking the outlook for the near term is fairly robust.

This chapter contains interviews with Henry Laas, CEO, Murray & Roberts; and Louis van der Watt, CEO, Atterbury Group

Telecoms & IT

Four main mobile operators and two fixed-line players cater to subscribers in a market that – like much of the emerging world – is seeing slowing subscriber growth and price cuts encourage a shift towards new value-added services. Delays by government agencies were cited as the biggest problem facing mobile operators, particularly in terms of getting permission to build infrastructure. Spectrum allocation delays also inhibit industry progress. The erosion of the fixed-line market will continue as mobile penetration keeps ticking upwards. There will, however, be convergence in some areas, such as termination rates. Data will continue to dominate growth as voice revenues fall and prices get even leaner.

The ICT sector is growing rapidly in terms of numbers connected, speeds attained and services provided. The industry as a whole is by far the largest and most sophisticated on the continent, contributing around 6% to GDP. Robust growth has benefitted in part from strong government support and high levels of corporate consumption; however, it has also faced challenges with last-mile linkages and infrastructure constraints. The increasing deployment of fibre means that broadband performance is set to improve further, as fibre has latency of 1.5 to 2 milliseconds, whereas digital circuits are more than one hundred times slower. Growth in the ICT sector will continue to be robust, as strong levels of investment are maintained and SMEs sustain demand in promising subsectors like cloud computing.

This chapter contains interviews with Sipho Maseko, CEO, Telkom; and Orlando Ayala, Corporate Vice-President & Chairman – Emerging Markets, Microsoft.

KwaZulu-Natal

Renamed KwaZulu-Natal (KZN) in 1994 following the merging of Natal province with KwaZulu, KZN is South Africa’s second largest provincial economy, serving as a strategically important base for manufacturing and exports. Though it occupies only 8% of the country’s land, KZN is responsible for 26.9% of its agricultural output, 21.6% of its manufacturing and 22.3% of its transport, storage and communications facilities. As home to Africa’s largest and busiest container port and bulk terminals, and sharing borders with Mozambique, Swaziland and Lesotho, the province plays a lead role in facilitating the country’s flow of trade. Developments now under way to convert greenfield sites near Durban’s King Shaka International Airport into a designated free zone and air freight hub are set to deepen the province’s integration and further unlock its potential for multi-modal logistics.

This chapter contains a viewpoint with Senzo Mchunu, Premier of KwaZulu-Natal; and an interview with Zamo Gwala, CEO, Trade & Investment KwaZulu-Natal.

Tourism

The South African tourism sector has been a major benefactor of the opening up of the economy and the country’s reintegration with the global community. Tourism’s economic contribution is taking on added importance in light of the fact that its expansion has been outperforming growth in the economy at large. The sector’s total contribution to GDP, for example, is expected to grow by 3.6% per annum by 2024. Total income for the accommodation sector rose 10.5% y-o-y in 2013, indicating hoteliers are recovering from the oversupply that resulted from preparations for the 2010 World Cup. International tourist arrivals reached 9.6m in 2013, a 7.1% increase from 2012. Industry participants, be they hotels, travel agents, or the tourist attractions themselves, will need to adapt their offering in recognition of the fact that the international visitor profile is slowly but surely changing. However, problems occasionally arise that may prevent the sector from reaching its full potential, such as a lack of coordination among stakeholders and conflicting agendas between government departments.

This chapter contains an interview with Marcel von Aulock, CEO, Tsogo Sun Group.

Agriculture

Despite a decline in agricultural production as a percentage of GDP in the past decade, agriculture remains a key component of South Africa’s economy and one of the country’s largest employers. In 2013 the sector as a whole contributed $5.48bn to GDP, on the back of primary annual agricultural production of $17.78bn. Agricultural production by volume rose by 2.7% in 2013. This can be attributed to a 4% increase in poultry meat, and a similar rise in goat and sheep mutton, pork and beef production; a 2.3% rise in field crop production, including sorghum, soya beans, sunflower seeds, dry beans and sugar cane; and a 0.6% increase in horticultural production, including citrus and deciduous fruit. Under the National Development Plan the government aims to create almost 1m new jobs in agriculture by 2030, primarily by expanding irrigation on arable land. South African farmers and other agriculture players also face high input costs, complex and shifting land reform regulations, labour unrest, dilapidated infrastructure and increasing competition from elsewhere. However, many local players are looking forward to continued expansion.

This chapter contains an interview with Chris Venter, CEO, AFGRI.

Media & Advertising

With a proliferation of multi-language broadcasters and publishers catering to a broader regional audience, South Africa is home to one of the continent’s larger media sectors. The media industry is dominated by a group of multinational conglomerates that work across multiple platforms, with the largest player reaching a market cap of $4.7bn. While print sales and advertising revenues are in decline, the segment still represents one of the most read and accessed forms of media in the country. However, increasingly and in spite of a lower level of online penetration, digital content is receiving greater focus.

Television and radio, because of their broad reach, remain the most popular mediums for delivering messages, while print advertising revenues are taking a hit due to declining readership and a shift, albeit from a low base, to digital platforms. The advertising segment is competitive and has a large number of homegrown firms, and most leading international ad agencies have a presence in South Africa, representing a client mix that is largely made up of multinationals with local operations as well as South African blue chip firms that are increasingly doing business abroad.

Health & Education

Access to free medical treatment is a constitutional right in South Africa, but though the government has devoted at least 12% of its budget to health care annually since 2010, the Department of Health (DoH) itself has characterised the system as “inequitable, with the privileged few having disproportionate access to health services”. Expenditure is split fairly evenly between the public and private sectors, but 84% of South Africans rely on state health care services, while the private facilities serve just 16% of the population. South African health care is poised for a huge overhaul. The question is whether the roll-out of the NHI programme is feasible, given the human resource, technical and financial constraints of the existing public health system.

Ample resources are invested in South Africa’s education sector, which ranks among the best on the continent. The state spends approximately one-fifth of its budget annually on education and training and has nearly achieved the goal of universal primary school enrolment that has proved so elusive elsewhere in sub-Saharan Africa. Some 14% of government expenditure is invested in basic education, according to UNICEF, though quality remains an issue, and low pass rates are especially prevalent in disadvantaged schools. With 10 globally recognised higher education and research institutions in the country, the tertiary education sector is the best in sub-Saharan Africa, and ranks 33rd in the world in terms of scientific research output. Now that black South Africans have been given access to the continent's best primary and tertiary education system, the government will have to focus on improving outcomes to create a pipeline of skilled youth that meets the needs of the labour market. The challenge will be cultivating the academic and financial capital to meet this goal.

This chapter contains interviews with Stephen Saad, Group Chief Executive, Aspen; and Jonathan Jansen, Vice-Chancellor and Rector, University of the Free State.

Tax

In conjunction with SizweNtsalubaGobodo, OBG explores the taxation system, examining South Africa’s investor-friendly environment. OBG talks to Kemp Munnik, head of taxation services at SizweNtsalubaGobodo, on relevant regulations for investors.

Legal Framework

OBG introduces the reader to the different aspects of the legal system in South Africa, in partnership with DLA Cliffe Dekker Hofmeyr. OBG talks to Brent Williams, CEO, DLA Cliffe Dekker Hofmeyr, on the African investment climate.

The Guide

This section includes information on hotels, government and other listings, alongside useful tips for visitors on topics like currency, visas, language, communications, dress, business hours and electricity.

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