South Africa boasts the most advanced, broad-based economy in sub-Saharan Africa. The investment climate is fortified by stable institutions; an independent judiciary and robust legal sector that respects the rule of law; a free press and investigative reporting; a mature financial and services sector; and experienced local partners.
In dealing with the legacy of apartheid, South African laws, policies, and reforms seek economic transformation to accelerate the participation of and opportunities for historically disadvantaged South Africans. The Government of South Africa (GoSA) views its role as the primary driver of development and aims to promote greater industrialization, often employing tariffs and other trade measures that support domestic industry while negatively affecting foreign trade partners. President Ramaphosa’s October 2020 Economic Reconstruction and Recovery Plan unveiled the latest domestic support target: the substitution of 20 percent of imported goods in 42 categories with domestic production within five years. Other GoSA initiatives to accelerate transformation include labor laws to achieve proportional racial, gender, and disability representation in workplaces and prescriptive government procurement requirements such as equity stakes and employment thresholds for historically disadvantaged South Africans. In January 2022, the World Bank approved South Africa’s request for a USD 750 million development policy loan to accelerate the country’s COVID-19 response. South Africa previously received USD 4.3 billion from the International Monetary Fund in July 2020 for COVID-19 response. This is the first time that the institutions have supported South Africa’s public finances/fiscus since the country’s democratic transition.
In November 2021 at COP 26 the GoSA, the United States, the UK, France, Germany, and the European Union (EU) announced the Just Energy Transition Partnership (JETP). The partnership aims to accelerate the decarbonization of South Africa’s economy, with a focus on the electricity system, to help achieve the ambitious emissions reduction goals laid out in South Africa’s Nationally Determined Contribution (NDC) in an inclusive, equitable transition. The partnership will mobilize an initial commitment of USD 8.5 billion over three-to-five years using a variety of financial instruments. In November 2022 the GoSA announced the Just Energy Transition Investment Plan (JET IP) for the five-year period 2023-2027 which sets out the scale of need and the investments required to achieve the decarbonization commitments in the country’s Nationally Determined Contribution (NDC).
South Africa continues to suffer the effects from a “lost decade” in which economic growth stagnated, hovering at zero percent pre-COVID-19, largely due to corruption and economic mismanagement. South Africa suffered a four-quarter technical recession in 2019 and 2020 with economic growth registering only 0.2 percent growth for the entire year of 2019 and contracting -6.4 percent in 2020. The economy grew by 4.9 percent in 2021 and shrunk by 1.3 percent in 2022. South Africa’s unemployment rate improved by 2.2 percentage points from 34.9 percent in 2021 to 32.7 percent in December 2022.
One of the biggest challenges to investment is persistent “loadshedding,” South Africa’s description for rolling blackouts. The country experienced loadshedding more than 200 days in 2022 and every day thus far in 2023. Lack of access to reliable power cripples economic growth and is a top concern for investors. Despite the record levels of power cuts, the International Monetary Fund (IMF) expects South Africa’s economy to grow by 1.2 percent in 2023 and by 1.3 percent in 2024. However, the South African Reserve Bank lowered its forecast for GDP growth in 2023 from about 2.6 percent to 0.3 percent. Other challenges include policy uncertainty, lack of regulatory oversight and enforcement, state-owned enterprise (SOE) drain on the fiscus, widespread corruption, violent crime, labor unrest, lack of basic infrastructure and government service delivery and lack of skilled labor.
The Ukraine-Russia conflict has impacted the South African economy to a much lesser degree than countries reliant on Russian energy and Russian and Ukrainian food exports and agricultural inputs, the war primarily exacerbates existing supply chain bottlenecks and inflationary pressures through higher energy and food prices, which negatively impact discretionary income and food security.
Due to growth in 2021, Moody’s moved South Africa’s overall investment outlook to stable. However, it kept South Africa’s sovereign debt at sub-investment grade. S&P in May 2022 upgraded its overall investment outlook to positive from stable, citing an improved fiscal trajectory. In November 2022, it maintained its positive outlook on South Africa, as the agency expects that a net external creditor position and the implementation of some structural reforms could lead to an easing of economic pressures. In March 2023, the ratings agency downgraded South Africa’s status from positive back to stable due to the impact of persistent electricity shortages and infrastructure constraints on economic growth.
Despite structural challenges, South Africa remains a destination conducive to U.S. investment as a comparatively low-risk location in Africa, the fastest growing consumer market in the world. Google (US) invested approximately USD 140 million, and PepsiCo invested approximately USD 1.5 billion in 2020. Ford announced a USD 1.6 billion investment, including the expansion of its Gauteng province manufacturing plant in January 2021.
To access the ICS, visit the U.S. Department of Department of State’s Investment Climate Statement website.