Opportunity amid volatility for corporations in South Africa

The year was 2011. Business confidence in South Africa was high, consumers were positive, and foreign investment was streaming in steadily. Real GDP grew at an average of 4.0% YOY. South Africa was a hotspot for emerging markets investment and poised to register strong growth figures as Sub-Saharan Africa’s largest economy.

Fast forward to 2013. South African GDP growth figures are down by about half, at 1.9% YOY. Unemployment has crept up, inflation refuses to come down, household debt remains at unhealthy levels, and consumer and business sentiment is depressed. By Q2 2014, the economy dips into recession, expected to grow only 1.5% YOY in 2015.

A combination of external shocks and internal factors brought the South African economy to its knees in the course of two years.

In a country that boasts one of the wealthiest middle classes in SSA, a developed business infrastructure, and a sophisticated financial sector, what went wrong? And what does it mean for companies involved in the region in 2015?

Bracing for Macroeconomic Instability

South Africa’s high level of integration with the global economy makes it vulnerable to external shocks, including the slowdown of China’s economy and the capital outflows caused by the sustained recovery of the US economy.

  • The country was especially affected by China’s pivot to becoming a consumption-driven economy, which led to diminishing demand for South African iron ore and caused commodity prices to slump. China’s slowdown will continue to hurt South African government revenue from corporate taxes paid by mining companies. This, in turn, puts pressure on the 2015 budget.
  • As investors anticipated higher interest rates in the US last year, the rand—and South Africa’s high level of debt denominated in foreign currency—was adversely impacted. The sharp withdrawal of hot money exposed the country’s banking sector and continues to run the risk of bursting property and credit bubbles.
  • Additionally, higher value-added taxes and income taxes are likely as the South African government struggles to honor its debt, an issue compounded by Moody’s recent downgrade of South Africa’s sovereign debt rating to Baa2 (two notes above “junk” status). Moreover, a stronger US dollar in 2015 will incentivize greater capital flight and put downward pressure on the already weak rand, impacting the affordability of imported goods and further depressing consumer sentiment.


Navigating Internal Tensions

Amidst external macroeconomic factors that shocked the country’s economy, South Africa’s crisis remains a tale of government inefficiency and social discontent. The following are three things your business can expect from South Africa in the coming year

  • Expect disruptions from policy makers: The African National Congress (ANC) is at a political crossroads. It is losing a significant part of its support base to opposition parties and is splintering from within as its alliance with the Congress of South African Trade Unions (COSATU) wavers. Voters from both sides of the political spectrum accuse the ANC of misrepresenting their interests. Corruption scandals, such as the R 246 million renovation of President Zuma’s Nkandla residence, and the ANC’s inability to deliver on basic services fuel public discontent. The business environment will continuously be undermined by the ANC’s political bind, as ineffective policy decisions have led to disruptions that increase business costs, lower productivity, and contribute to business anxiety.
  • Brace for more frequent strikes and protests: The gloomy state of the economy benefits trade unions, whose populist appeal will continue to rise in 2015. South Africa’s trade unions are undergoing major restructuring, as highlighted by metalworkers’ union NUMSA’s split from COSATU. As unions seek new members, their leaders have taken a firmer stand in wage talks and encouraged strikes. Public sector unions representing 1.3 million workers will continue to pressure the government for wage increases in 2015, which tends to influence private sector demands for salary hikes. Companies should brace for more frequent strikes and protests in 2015, which could harm productivity, especially for business-to-business corporations, as their local customers face disruptions in production.

MetalworkersStrike (Image: A five-month long metalworkers’ strike crippled mining output, stalled economic growth and will contribute to unemployment in the medium-term as mining companies restructure their organization to meet wage hike agreements)

  • Prepare for continuing electricity crisis: Once known for its cheap and relatively abundant power supply, South Africa faces a nationwide electricity crisis that is extremely disruptive for consumers and businesses. National electricity provider Eskom is struggling with infrastructure disrepair and a financing gap that leads to frequent power outages and the ongoing risk of load shedding (interruptions in supply to prevent the collapse of the electricity grid). The availability factor (the percentage of plants available after breakdowns and maintenance) is at 75%, well below the international benchmark of 90%, causing major disruptions in power supply. Erratic billing practices for consumers and high maintenance costs have caused massive revenue shortfalls, leading to a government bailout of Eskom and tariff increases for customers. Although privatizing the utilities company remains a possibility, companies should brace for greater disruptions in 2015 as the electricity crisis shows no sign of abating.

Finding Continued Opportunity

The upcoming year will be a test for South African politics, as new and old political parties will seek greater influence with the electorate ahead of the 2016 municipal elections. As global volatility continues to undermine the country’s macroeconomic environment, politicians will come under greater public pressure to deliver on inclusive growth and alleviate the crisis. Indeed, South Africa’s economic recovery hinges on the country’s socio-political dynamics, which, in turn, will determine many of the challenges multinationals should expect to face in 2015.

However, the current economic climate does not diminish the fundamental drivers of South Africa’s attractiveness. The country boasts one of the wealthiest middle classes in SSA, a developed business infrastructure, and a sophisticated financial sector that enables relatively easy access to credit for consumers and businesses alike. The private sector is competitive and the economy diversified, creating opportunities across many industries.

South African firms are growing their pan-African footprints, fueling greater regional integration that opens new markets for multinationals based in the country. Operational challenges will persist, yet so will opportunities for companies committed to the market for the long-term.

For an in-depth analysis of South Africa’s economic outlook in 2015 and the impact by industry, FSG clients can read the Market Spotlight: South AfricaNot a client? Contact us to learn more.

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