INVESTING IN SOUTH AFRICA

Ryan RobinsonMcKenna ForrestLauren Schreiber

Where in the World is South Africa?

Topography

Major Minerals & Resources

• 90% of Earth’s platinum metals

• 80% of manganese • 73% of chrome• 45% of vanadium• 41% of gold• Leading producer of

precious metals • 4th largest producer of

diamonds

Size/Population

• 25 largest country in the world• Population: 49.3 million

o Africans (blacks)o Whiteso Colouredo Asians

A Rainbow Nation

• Colonization and immigration has formed a diverse country

• Population of racially diverse origins, cultures, languages, and beliefs

• Makes it difficult to generalize business and social culture

Communication

• 11 Official languages: o Zulu 23.8%, Xhosa 17.6%, Afrikaans 13.3%, Sepedi 9.4%,

English 8.2%, Setswana 8.2%, Sesotho 7.9%, Xitsonga 4.4%, other 7.2%

• Literacy Rate: 86.4%• Must be able to understand and identify individual’s cultural

ancestryo English-speakers: avoid conflict, more reservedo Afrikaaner: more direct, forthright and honest

Labor Force    

• Unemployment Rate (2010): 25.2%o ranked in the top 10 countries in the world for

income inequality

• Literacy Rate (2010): 86.4% 

• Strong network of universities host international academics and researchers, with the majority of research and development in South Africa

• Government has introduced wide-ranging legislation to promote training and skills development 

Unions & Strikes

• Union membership rate:  3.1m memberso 25% of the formal work force

• # of labor days lost to strikes: 497,436 (2008)• Drawn out strikes and corruption are major

concernso Could be remedied by government spending, but

that runs the risk of higher inflation and higher deficits.

BEE – Black Economic Empowerment• Created by SA government to redress the

inequalities of Apartheid• Aimed to be a “growth strategy”• Companies graded by a scorecard on:

o Direct empowerment through ownership/control of enterprises

o Management at senior levelo Employment equityo Indirect empowerment

Imports/Exports

Imports:- machinery and equipment- chemicals- petroleum products- scientific instruments

Major Trading partners: China, Germany, US

Exports:- gold- diamonds- machinery and equipment

Government Structure

• Parliamentary Democracy• Federal system of government

comprised of national, provincial, and local levels

• Power is shared between President & Parliament

• 5 Year term for President elect

Government & Society

• President: Jacob Zuma

• President acts of Head of State, Commander in Chief of Military

• Currently 16 Political Parties represented in Parliament

• African National Congress, dominant political party since 1994

• Capitalist society

• 3 capital cities:

o Cape Town (legislative)

o Pretoria (administrative)

o Bloemfontein (judicial)

Government Debt    

• South African debt predominantly based on• paying for the funding of the apartheid regime’s - military operations in

Namibia and Angola

• National government debt decreased from 50.4% of GDP (1995) to 23.8% (2008) resulting in a reduction in government's liability over the years.

• Estimated to increase to 44% of GDP in the next 5 years before gradually declining

• According to the IMF SA ranks 17th for lowest level of debt in relation to size of the economy

Government Involvement

• Recent government policies have been focused on fiscal and monetary discipline, which is seen in:

lower inflation low budget deficit  stable and strong currency. 

• The Industrial Policy Action Plan has also provided incentives to industries.

Currency

• Rand (R) divided into 100 cents (c)

• ISO code: ZAR

• Current currency exchange rateo 7.13 R / $

• Rand survived 3 crises & currently improvingo Currency risk has declinedo Appreciated

Rand Fluctuations ZAR to USD

Currency & Translation Risk

Currency Risk:  

o Rand is currently overvalued

Finance Minister plans on building larger reserves to take more money off of the market.  

Due to the large influx of foreign direct investment over recent years, the Rand has been appreciating at a rapid rate

The government is trying to stem the amount of foreign direct investment flowing into SA to slow down currency appreciation.

Translation Risk:  

o Due to the currency appreciation, it’s also become more risky in terms of converting currencies.  

o Ideal conditions for investment would be a relatively constant exchange rate; the SA Rand has been rapidly appreciating which means currency exchanges are volatile.

Economic History

• 1652: Dutch Settlers arrive followed by French and German

• 18th Century: British take control of colony and establish the Boer Republics 

• 1948: National Party gains control, instills Apartheid Policy

• 1980's: Stringent sanctions placed on SA due to racial prejudiced policies

• 1994: ANC (African National Congress) Party & Nelson Mandela wins first multi-racial elections and dismantles Apartheid

Economic Environment

• GDP PPP (2009): $505.3 billion o GDP grew by 5.2 % in 2007 o Country comparison to the world: 26

• GDP nominal: $287.2 billion• GDP per capita: $5,787• Inflation Rate (2009): 7.1%• World Economic Forum's Global Competitiveness

Report 2008 ranked South Africa 45th out of 134 global nations for ease of doing business

Macro Economic Stability

• Government has implemented macro-economic policies directed at promoting domestic competitiveness, growth and employment.

• Economy is growing substantially and additional jobs have been created

• Economic expansion strengthened by investment and domestic expenditure.

• GEAR strategy: growth, employment and redistribution

Trade

• Trade Balance: deficit of $3.8 billion

• Trade Balance with US: deficit $US 1.6 billion

• Favors free trade• Member of the WTO,

G-20, and SACU

Financial Markets

• The SA Banking system is comprised of;o a central bank,o several large banking and investing institutions o small local banks 

• SA has a Reserve Bank and Financial Services Board• SA Exchange Market: The JSE Limited (Johannesburg

Stock Exchange)o SA's only Securities Exchange is the world's o 18th largest exchange market with over 400 companies

listed and a market capitalization of R3.3 Trillion

Portfolio Investment

• World Economic Forum's Global Competitiveness Report 2010-11 ranks South Africa high for its regulation of securities exchanges 

• JSE emphasizes the importance of a well-regulated securities exchange for international investors post the global financial crisiso during the crisis, unlike many exchanges, the JSE did not

introduce circuit breakers or ban short selling 

Foreign Direct Investment (FDI)

• South Africans prefer doing business with locals: FDI is a great opportunity because foreign investors can utilize existing SA companies to engage in Joint Ventures with and do business locally

• Real Estate development is a booming business in South Africa; there is a high demand for affordable housing and there is currently a lot of Foreign Direct Investment from North America going into development into new homes and apartments

•  Attractive investment opportunity due to:o low costso great climateo huge pool of creative people o skillfully managed economy

Recommendations    

• PROS: o rich in natural resourceso skilled laboro need for housing and advancement in infrastructure post-

apartheido emerging market and economy

• CONS: o corruption and briberyo fluctuating currencyo still developing in international markets

• Advice:o invest in FDIo hesitant but optimistic about Portfolio 

The End    

With its advantageous location and a government receptive to foreign direct

investment, South Africa certainly looks as though it is becoming an international force to

be reckoned with!