Ten reasons to invest in South Africa (or not) – 9 November 2018

Standard Bank has produced an infographic on ten reasons why foreigners should invest in South Africa as part of the government’s drive to attract $100bn over the next five years. In order to extract the best value behind each of these reasons, we have to understand the broader context, as well as the limitations. At Regenesys Business School we encourage realistic critical thinking.

Our finance contributor, Helmo Preuss will examine each reason critically, but it is up to you to exercise your judgment as to how  we can mitigate these negatives.

 

  1. Healthy legal and regulatory environment for business

Despite having the global best practice corporate governance code in the King code and amongst the best anti-corruption legislation in the Public Finance Management Act, over the past decade South Africa has experienced state capture where the PFMA was ignored, the Steinhoff and VBS Bank accounting scandals. The good news is that these scandals are likely to make the regulators more vigilant in future.

  1. The South African Reserve Bank is independent and internationally acclaimed

It however failed to prevent the Regal Treasury Bank and VBS Bank scandals from taking place. It has also yet to introduce deposit insurance even though the US implemented that in 1934 and many countries have some sort of deposit insurance scheme in place.

  1. South Africa has a strong financial and banking sector

The problem however is that the banking sector is very concentrated so there is not enough competition. This is reflected in the fact that the average overdraft rate charged by the commercial banks in August 2018 was higher than in January 2017, even though the repo rate has been cut by 50 basis points over that period.

  1. South Africa has an innovative and dynamic technology sector

Which however has been hobbled by government, which tried to protect Telkom in the late 1990s from Internet competition and has been unable to implement a switch from analogue to digital television, even though the plan was that would be implemented before the 2010 Soccer World Cup. The result is that Lesotho has a 5G network and South Africa does not, as the necessary radio frequency has not been allocated to the mobile telephone companies.

  1. South Africa is internationally respected

This was due to the halo effect arising from Nelson Mandela’s Presidency. Since then however South African officials were implicated in the Iraqi oil-for-food scandal, failed to speak out against the illegal land invasions in Zimbabwe and the ethnic cleansing in Myanmar. Several diplomats have also been sacked due to sexual harassment charges or other moral failures.

  1. South Africa has a sophisticated and promising emerging market

Which lacks the wherewithal to buy goods and services as the unemployment rate is more than 27% and the labour force participation rate is only 43%. This was highlighted by the third quarter 2018 data which showed that although the working age population grew by 611 000 y/y, the number of formal sector jobs fell by 125 000 y/y.

  1. South Africa has a diversified economy

Where most sectors of the economy are in decline. In the first quarter 2018, only four (government, personal services, finance and transport) sectors out of ten had a positive quarterly growth rate.

  1. South Africa has a modern and well-developed transport infrastructure

Where the payment of etolls is ignored by most road users, threatening the future expansion of highways, while many derailments on the Sishen-Saldanha railway resulted in Kumba Iron Ore not meeting its export targets. In addition, service delivery protests have resulted in the disruption of the main arterial transport routes such as the N3 on occasion. Despite the good transport infrastructure, South Africa was only ranked 143 out of 190 countries in terms of the ease of doing cross-border trading in 2018, while Botswana was ranked 55.

  1. South Africa hosts many multinational headquarters

But increasingly many multinationals are choosing to go to Nairobi or Lagos or Addis Abba as high data and labour costs in South Africa make other African countries more attractive.

  1. The African Continental Free Trade Area will boost intra-African trade

South Africa has yet to implement a single One Stop Border Post even though there are more than 50 on the African continent with the first one in 2009 being at Chirundu between Zambia and Zimbabwe.

 

This contribution to Finance Friday was made by

Helmo Preuss

Forecaster Ecosa cc

+27 79 773 2458

helmop@yahoo.com

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