Successfully investing in South Africa

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last updated on 24 June 2022 | reading time approx. 6 minutes

 

 

 

How do you assess the current economic situation in South Africa?

South Africa's economy is increasingly recovering from the Covid-19 crisis. Negative impacts have been seen in many sectors of the economy, particularly in the travel and tourism branch. But the energy, infrastructure and industry sectors have also suffered not only from Covid-19, but also from ongoing corruption and mismanagement. 
 
The energy sector has been an important area for government support. Increased attention is being paid to renewable energies (RE), which are to be significantly strengthened in the country. Due to its climatic situation, South Africa offers very good conditions that can contribute to an environmentally friendly energy supply and positive economic development.
 
At the same time, it can be observed that the vaccination process within the country is progressing very slowly. From today's perspective, it can be assumed that it will take some time before the necessary number of people are vaccinated in this country to achieve herd immunity – even though vaccine is available in sufficient quantities for the population. A similar situation can be observed in various African countries, especially Kenya.

 

How would you describe the investment climate in South Africa? Which sectors offer the largest potential?

For German companies wishing to invest in the sub-Saharan region, South Africa remains an attractive business location with its highly developed financial and legal sector and modern infrastructure. In the future, this could also include other countries in the Pan-African Free Trade Area, which came into force on 1 January 2021. The ratification process of this agreement is progressing in the member countries.
 
The traditionally important mining sector offers very good prospects for foreign investors. Above all, the rising raw material prices, partly due to the strong demand from the People's Republic of China, and the increasing demand in the precious metal platinum, which is an important component for hydrogen-based propulsion technology, predict good economic prospects for the mining sector. Thus, the commodity industry should continue to grow. However, the rise in energy prices as a result of the war in Ukraine could also reduce economic development in South Africa. Other major potentials for German companies are shown above all by the renewable energy sectors, especially in wind and solar energy as a solution to the growing demand for energy (German technology), as well as the manufacturing industry sectors (including food processing and packaging, beverage industry, fertilizer production), automotive manufacturing, petrochemicals, medical technology and telecommunications. 
 
Potential future markets are predicted above all in the areas of e-mobility, production of “smart textiles”, IT services (e.g. “business process outsourcing”), agribusiness, renewable engergies, circular economy (recycling), sustainable construction and the production of biofuels.
 
In addition, there is the rapidly advancing digitalisation, especially in the areas of agribusiness, health, edu­cation, information and communication technology (mobile networks, cloud solutions), trade and e-logistics. In contrast, infrastructure projects from foreign investment into South Africa are still developing too slowly, having declined in 2020 due to Covid-19.
 
Another aspect – beneficial for South Africa – is the increased global demand for coal, due to the war-related shortage of supplies from Russia. Other raw materials that originally entered the world market from Russia could be partly supplied from South Africa. South Africa's abundance of raw materials could help to stabilise world market prices and have a positive effect on South Africa's economic balance.

 

What challenges do German companies face during their business ventures into South Africa?

The challenges for German companies in South Africa continue to be the permanent changes and the tightening of the criteria for “Broad-Based Black Economic Empowerment” (BEE). This includes, for example, the requirements for ownership participation of coloured population groups, which can be an obstacle for foreign companies. For this reason it is indispensable for the German investor to deal with the legal framework or the BEE laws. In this case, it would be indispensable to operate with a South African partner that meets the relevant BEE criteria. The extent to which BEE is seen as an obstacle to entrepreneurial business activity will become apparent in each individual case. The current political developments do not point to a weakening of official BEE handling.
 
The legal situation in the area of immigration law also remains uncertain, and secondments of employees from Germany must be well planned and organised over the long term.
 
Other challenges include the country's volatile currency and the increase in electricity prices. The mining sector and energy-intensive industries are particularly affected by controlled power cuts (“load shedding”).
 
One challenge for the automotive industry is to adapt to market developments and sales markets and invest more in electromobility. At the same time, the lack of qualified - foreign - skilled workers is particularly noticeable in the automotive sector. The necessary transfer of know-how from the companies' headquarters in Germany, among other places, is only taking place to a very limited extent.
 
Foreign investors may shy away from certain risks due to the Covid-19 pandemic. Possible capital outflows would then result in a devaluation of the South African rand (currency loss). At the same time, it cannot be assumed that foreign companies, which have proven to be reliable partners even in difficult times, will withdraw from South Africa because they are already „storm-tested" and prepared for crises due to their risk planning. From the current point of view, it is conceivable that these entrepreneurs will not be deterred by this Covid-19 crisis or other political turbulences and will therefore continue to do business in the country. Africa is a continent of opportunity. This is also in line with the results of a survey conducted by AHK Southern Africa in August 2020.
 
The South African government's goal is to implement far-reaching reforms, some of which are already in the implementation process. The key objectives include the country's energy security, the fight against crime, the reduction of bureaucracy, the necessary reorganisation/privatisation of state-owned enterprises, the creation of jobs and ultimately also the creation of investment incentives for foreign investment.
 
The entry into force of the German Supply Chain Compliance Obligations Act (LkSG) on 1 January 2023 means another challenge for the German companies concerned that are active in Africa. This, because they will have to revaluate their global supply chains and reorganise themselves. This means that they must, among other things, trace their production processes and working conditions in their supply chains and take measures to eliminate any violations in this context. This is especially applicable for the vulnerable textile and automotive sectors. 

 

How does the market for Renewable Energies (RE) develop in South Africa?

The market for RE in South Africa is developing positively, but very slowly. With a three-year delay, the public tender programme for renewable energy projects (“Renewable Energy Independent Power Production Procurement Program”, short: REIPPP) will enter its fifth round in April 2021. Furthermore, the legal framework for self-generation and PPAs is continuously improving. The demand for RE self-generation is increasing, especially due to the continuously rising electricity prices. Another aspect is to become less dependent on the state-owned power provider Eskom. A significant step is that electricity generation plants for renewable energies up to 100 MW now no longer require an official electricity generation permit.  
 
This sets an important course for the country's energy supply, especially for the mining sector and industry. For German companies, this will result in great business opportunities, especially in energy technology (plant technology including support services, project developers). At the same time, this also applies to the further development of the South African economy.
 

In your opinion, how will South Africa develop?

It can be assumed that the pandemic situation will gradually stabilise again as the number of infections continues to fall in the wake of successful vaccination. Under this assumption, South Africa's economic growth can be expected to slowly pick up again. If the electricity market continues to develop positively (high private investments in renewable energies is expected), this sector will certainly help to boost economic growth. Finally, the further development of the economy in South Africa will certainly also depend to a large extent on the further course of the Covid-19 pandemic. The summer and travel season in South Africa, which comes at the end of the year, and the associated further economic revival through tourism, among other reasons, will have a positive effect on South Africa.
 
The pan-African free trade zone also means opportunities for the African and European countries and thus also for South Africa as a hub for German investors. 
  
What remains to be seen are any political measures and further impulses to stimulate the economy in view of the next elections. President Ramaphosa will strive to present a positive balance sheet with regard to economic developments at the end of his current political term. Especially in view of the competing political camp, this aspect will be decisive in determining whether Ramaphosa can maintain his current course for the further development of South Africa. In any case, an opening of the South African market for qualified foreign workers and further regulatory relief for the energy and infrastructure sectors would be beneficial.  

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Dieter Sommer

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Grit Campos Nave

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