Republic of South Africa Business Guide

Introduction

South Africa, officially the Republic of South Africa is a country located at the southern tip of the African continent. It borders Namibia, Botswana, Zimbabwe, Mozambique, Swaziland, and Lesotho, an independent enclave surrounded by South African territory. South Africa is a member of the Commonwealth of Nations.  South Africa has experienced a different history from other nations in Africa as a result of early immigration from Europe and the strategic importance of the Cape Sea Route. European immigration started shortly after the Dutch East India Company founded a station at (what was to become) Cape Town in 1652. The closure of the Suez Canal during the Six Day War exemplifies its significance. The country's relatively developed infrastructure made its mineral wealth available and important to Western interests, particularly throughout the late nineteenth century; then, with international competition and rivalry during the Cold War. South Africa is an ethnically diverse nation with the largest white, Indian, and racially-mixed communities in Africa.

Economy
 
South Africa is a middle-income, emerging market with an abundant supply of natural resources; well-developed financial, legal, communications, energy, and transport sectors; a stock exchange that ranks among the 10 largest in the world; and a modern infrastructure supporting an efficient distribution of goods to major urban centers throughout the region.  However,, this development is significantly localised around four areas, namely Cape Town, Port Elizabeth, Durban, and Pretoria/Johannesburg. Beyond these four economic centres, development is marginal and poverty still reigns despite government efforts. Consequently the vast majority of South Africans are poor. However, key marginal areas are experiencing rapid growth recently. Such areas include: Mossel Bay to Plettenberg Bay; Rustenburg area; Nelspruit area; Bloemfontein; Cape West Coast; KZN North Coast amongst others.
 
Large income gaps and a dual economy designate South Africa as a developing country. South Africa has one of the highest rates of income inequality in the world. The white South African minority tends to be richer than the rest of the population. A decade of continual economic growth has helped to lower unemployment, but daunting economic problems remain. Other problems are crime, corruption, and HIV/AIDS.
 
At the start of 2000, President Thabo Mbeki vowed to promote economic growth and foreign investment by relaxing restrictive labour laws, stepping up the pace of privatisation, and cutting unneeded governmental spending. His policies face strong opposition from organised labour. South Africa is also the continent's largest energy producer and consumer.
 
The rand, the world's most actively-traded emerging market currency, has joined an elite club of fifteen currencies, the Continuous linked settlement (CLS), where forex transactions are settled immediately, lowering the risks of transacting across time zones. The South African rand (ZAR) was the best-performing currency against the United States dollar between 2002 and 2005, according to the Bloomberg Currency Scorecard. 

The volatility of the rand has affected economic activity, with the rand falling sharply during 2001, hitting an historic low of R13.85 to the U.S. dollar, raising fears of inflation, and causing the Reserve Bank to increase interest rates. The rand has since recovered, trading at R6.99 to the dollar as of January 2007 while the South African Reserve Bank's policy of inflation targeting has brought inflation under control. The stronger rand has however put exporters under considerable pressure, with many calling for government to intervene in the exchange rate to help soften the rand, and many others dismissing staff.

Market Overview

Welcome to the South Africa Country Commercial Guide (CCG). This guide presents a comprehensive look at South Africa's  ommercial environment, using economic, political and market analysis. South Africa's market size (44 million people), infrastructure, and pro-business environment make it the logical choice for companies seeking a stepping-stone to conduct business on the African continent. It is the most advanced, broad-based and productive economy in Africa, with a 2005 gross domestic product (GDP) of $239.5
billion. The South African economy is characterized by standards similar to those found in developed countries. Its service sector is well established and growing and the economy is increasingly well managed with slow but steady industrial productivity gains. It has a well-developed physical infrastructure that is comparable to OECD standards. It boasts a sophisticated financial sector with well-developed financial institutions and a stock exchange (Johannesburg Stock Exchange) that ranks among the top exchanges in the world. Thanks to the commodity-driven export boom and surging retail demand, a medium term growth rate of 6 percent is attainable and its improving 2006 investment risk rating places it squarely among the pre-eminent second-tier emerging markets. Some quick facts regarding South Africa’s economy and its foreign trade:

• The United States is the third largest source of South African imports (9.4%), after Germany (17.1%) and China (10.2%), and it is followed by Japan (8.5%) Saudi Arabia (6.6%) United Kingdom (6.6%) and France (5.2%)
• The United States is the largest portfolio investor in South Africa and the second largest source of foreign direct investment (FDI) in South Africa, after the U.K. (Total U.S. FDI is $5 billion with total FDI in South Africa at the end of 2005 amounting to $ 76.9 billion.
• The mature nature of the South African economy is reflected in the mix of economic sectors: agriculture (incl. fishing and mining): 9%, manufacturing industry: 24%; and the services sector: 66%.
• The national retail consumption patterns reflect the disparate nature of the economic status of its citizens, ranging from basic needs (e.g., condensed milk) to high-end durable consumer goods (e.g., SUV’s).

Over the past five years, South Africa has further integrated into the global trading system by concluding free trade agreements with the European Union, by far the largest Country Commercial Guide for South Africa 2007 trading partner of South Africa, with its neighbors in the Southern African Development Community (SADC), and with the European Free Trade Association and Mercosur. The Southern African Customs Union (SACU) agreement with Botswana, Namibia, Lesotho, and Swaziland, first entered into in 1910, has also been renegotiated and ratified by all members. With the passage of the African Growth and Opportunity Act (AGOA), there has been an increase in bilateral trade between the United States and South Africa. The United States is currently negotiating a Trade and Investment Cooperation Agreement with SACU.

GDP grew from 4.7 percent in 2005 to an estimated 5.1 percent in 2006. In 2007, economists anticipate 4.7 to 5.4 percent economic growth, with robust government expenditure pushing the economy forward. Extensive structural reforms have spurred a boom in the services industry as well as in merchandise exports. The low interest rate environment continues to underpin high business and consumer confidence. Structural reforms in general have also increased the economy’s diversification and openness, bolstering its resilience to external shocks. Thanks to a surprisingly stable Rand (2006 average exchange rate was Rand 6.9 to the U.S. Dollar), in the light of a significant consumer-driven current account deficit, the South African economy in 2006 was left largely unscathed by the high cost of energy imports. Inflation has ticked up over the past year, but remains within the South African Reserve Bank’s managed target range of between 3 and 6 percent.

Over twelve years after the watershed 1994 democratic elections, South Africa continues to maintain a stable political environment. This underpins the government’s market-oriented economic policies and its steady progress towards restructuring state assets and introducing competition for state-owned enterprises (SOE’s).

Market Challenges

U.S. firms entering this market must contend with a typically mature market with wellestablished, mainly European competition. A trade agreement with the European Union enables many European products to enter South Africa duty free and at lower rates than U.S. products. It is a very competitive market. Newly formed Broad-Based Black Economic Empowerment (BEE) policies on redressing economic imbalances amongst historically disadvantaged communities require consideration by all firms planning to do business with the South African government. Although unemployment remains high, skilled labor may be difficult to find in certain sectors. U.S. firms should be aware that crime against business is a concern and should be addressed in market planning. High telecommunications costs and high security costs do add to the cost of doing business in South Africa.

Market Opportunities

Opportunities for U.S. exporters and investors in South Africa reflect the growth of its consumer base and its efforts to upgrade and develop its infrastructure to match and further fuel its economic growth. Factors benefiting U.S. exporters include:

• A sustained, strong retail environment (automotive sales are up 14 percent from 2005 to 2006) is expected to last for the foreseeable future;
• A stable currency that has recovered since the crash in 2001-2 (the 2006 average of $6.90 was only marginally below the 2000 trade weighted average of $6.94);
• U.S. branded goods are gaining market share;
• South African Government-owned corporatized parastatal utilities such as Eskom (energy) and Transnet (transportation) have formalized capital expenditure plans for over $50 billion over the next five years; and 
• The awarding to South Africa of the 2010 FIFA World Cup Soccer championship is expected to result in $2 billion in improvements and investment in sporting facilities.

In general, the best prospects for exports are in capital goods, though opportunity exists in a wide range of consumer products and services as well. Of particular note are:

• Electrical Power Systems;
• Telecommunication Equipment;
• Airport/Ground Support Security;
• Automotive Parts/Service Equipment;
• Transportation, Infrastructure and Civil Construction;
• Franchising;
• Renewable Energy;
• Safety/Security Equipment;
• Pollution Control Equipment;
• Mining Equipment;
• Medical Equipment;
• Telecommunications Services; and
• Sporting Goods.