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WorldOctober 1 2014

South Africa will benefit from Africa’s rise

South Africa’s growth has been sluggish of late but the country’s financial sector remains one of the world’s most sophisticated, while the government’s reforms are allowing businesses to tap into fast-growing markets in the rest of sub-Saharan Africa more easily.
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South Africa will benefit from Africa’s rise

Over the past 20 years, South Africa’s economic prospects have become increasingly intertwined with those of the rest of the African continent. Before 1994, economic sanctions prevented South African businesses from expanding into Africa. Since then, South African firms have invested heavily in retail, telecommunications, banking, construction and mining in the region.

South African investment on the continent not only creates jobs in the destination countries but is also an important source of South Africa’s foreign exchange earnings and tax revenue. Almost 30% of South Africa’s non-mineral exports are destined for the continent, up from 19% a decade ago. By comparison, 28% of exports go to the EU.

South Africa remains the largest investor in the continent. According to the United Nations Conference on Trade and Development (Unctad), the total stock of South African investments in the continent stands at $23.6bn, compared with China’s $21.7bn. Last year, outward foreign direct investment (FDI) from South Africa into the continent almost doubled to $5.6bn, and Africa accounted for 12% of South Africa’s dividend earnings in 2012, up from 2% in 2002.

Encouraging growth

To encourage even greater investment into and trade with other African countries, and to promote South Africa as a hub for financial services, the South African government has announced a number of tax and financial sector measures. These include the establishment of 'foreign member funds', which will help to create a domestic hub for the management of African funds, and extending its 'HoldCo' regime, which simplifies investment into Africa from South Africa by allowing firms that form holding companies to be free of foreign exchange restrictions for their African and other offshore operations.

In addition, various administrative reforms will simplify cross-border transactions. Improvements at our border posts have helped increase the speed of goods entering and leaving the country. A process is under way to lower port tariffs, while a new pricing structure at local ports will reduce transport costs and enhance competitiveness. Container export tariffs have already fallen by 43%.

South Africa’s growing economic links with the rest of the African continent come as sub-Saharan African economies grow at a faster pace than in previous decades. This growth has attracted the attention of international investors who have invested in such sectors as media and communications, financial services and retail, which make up about half of all FDI flows into Africa, according to Unctad.

The resultant transformation of the investment profile is remarkable. The extractive industry made up just 11% of the value of new greenfield projects in 2013, compared with 53% in 2004. Extractive industries now make up just 26% of the total investment stock in Africa, compared to 31% in manufacturing and 43% in services. GlaxoSmithKline, Wal-Mart, Google, IBM and Microsoft are just some of the investors in Africa.

The rise in investment is part of a virtuous cycle that sub-Saharan Africa currently finds itself in – rising growth has supported employment, profitability and further investment.

Perceptions are changing

In the Africa attractiveness surveys carried out by professional services firm Ernst & Young, the continent has risen steadily from the third least attractive investment region out of 10 in 2011 to the second most attractive in 2014. The same survey, however, shows a large gap in perceptions between those who are doing business on the continent and those who are not: 87% of investors already in Africa believe its attractiveness will improve over the next three years, but only 51% of non-investors believe this is the case.

Investors are also taking part in the very real emergence of the middle class in Africa – the natural outcome of rising employment, wages and prosperity. Gross domestic product (GDP) per capita in current dollar terms tripled from $530 in 1995 to $1569 in 2012, according to World Bank figures. As GDP has risen, so too has expenditure on goods such as medicine.

This has placed the continent in a position to take advantage of its demographic dividends: sub-Saharan Africa has a young population with a low dependency ratio, while the gross primary school enrolment rate has risen to more than 70%.

The population is, slowly, becoming more urbanised. The proportion of those living in urban areas has risen by almost 4% every year since 2000, and now stands at about 40% of the total population. For developing sub-Saharan countries (excluding middle-income economies such as South Africa), malnutrition in children younger than five years has dropped by about five percentage points to 20%. 

Financial development

Increasing wealth has brought with it increasing financial market development. The six largest stock exchanges in sub-Saharan Africa have a combined market capitalisation of $1000bn. South Africa makes up approximately 85% of this, but the growth in other countries has been impressive. The development of local pension funds should begin to boost liquidity and the sophistication of market participants.

Improved growth has also helped to underpin investor interest in government debt, which has grown at a pace to match the increase in equity investments. Prudent macroeconomic management means that public debt levels in sub-Saharan Africa remain low – average external debt stands at just 25% of GDP.

The International Monetary Fund (IMF) expects fiscal balances to improve over the next two years, as many governments are planning fiscal adjustments based primarily on expenditure restraint. Authorities are making an effort to become more transparent, use better technology and cut transaction costs. The results are already clear: according to the World Economic Forum’s (WEF’s) latest global competitiveness report, South Africa, Kenya and Mauritius all rank in the top fifth for financial market development.

South Africa’s pace of economic growth might not have been as fast as the average for the sub-continent of late, but it remains a leader in the region.

The WEF report rates South Africa’s institutions highly, 36th out of the 144 countries ranked. Intellectual property protection, property rights and the efficiency of the legal framework in settling disputes are particular sources of excellence. The high accountability of private institutions further supports the institutional framework, the report showed. Furthermore, South Africa’s financial market development remains impressive – it was placed seventh globally. Our position in these rankings regarding business sophistication and innovation are testament to the high quality of our institutions.

Overcoming external shocks

South Africa’s stable macroeconomic platform has proven resilient and sufficiently flexible to adjust to a volatile global environment. Its flexible exchange rate has acted as an effective shock absorber for global turbulence.

Deep and liquid financial markets reduce funding vulnerabilities. Strong balance sheets and low levels of foreign currency-denominated debt support the resilience of the financial system. South Africa’s debt levels are manageable and the long-term fiscal outlook supports sustainable public finances. The medium-term expenditure framework establishes a predictable budget process that is open to public scrutiny. The country has a progressive and efficient tax system.

The well-regulated and well-managed financial institutions are able to respond to changing global conditions.

However, we are not resting on our laurels. Growth has been sluggish and unemployment remains a challenge. Electricity supply constraints and labour market unrest have weighed on growth.

The government recognises these challenges and the need to improve the functioning of the labour market, end infrastructure bottlenecks and create a competitive environment for the private sector to raise long-term growth prospects.

A lack of adequate planning and capacity in the public sector has delayed infrastructure rollout and undermined service delivery. But progress has been made in speeding up the implementation of major building programmes. The Presidential Infrastructure Coordinating Commission is coordinating the planning and implementation of strategic infrastructure projects to accelerate delivery.

The IMF estimates that sub-Saharan Africa will grow economically at an average of 5.5% over the next two years and that the region will remain one of the most buoyant in the world. While this path is not without its risks, the continent is undoubtedly the next growth frontier.

Notwithstanding the challenges, Africa is indeed rising.

Nhlanhla Nene is the South African minister of finance.

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Read more about:  Analysis & opinion , Africa , South Africa