Due to cyclical, structural and regulatory/policy challenges in the economy, government capital and operational spending has been severely curtailed since 2016, and a double deficit (budget and household) suggests that economic decline may accelerate over the short term. The currently resurgent Rand currency reflects a 20-year plus record current account surplus based on robust commodity exports and muted imports.
There is growing concern about a host of political, economic, and regulatory factors that affect foreign businesses adversely. These include reports about corruption and mismanagement in government, significant unemployment, violent crime, insufficient infrastructure, and poor government service delivery to impoverished communities; these factors have been exacerbated by the Covid-19 pandemic. However, some progress is being made in reforming the State-Owned Enterprises (SOEs) that were tainted by corruption and mismanagement. This has also resulted in power disruptions that have affected production. SA National Treasury oversees compliance with the Public Finance Management Act (PFMA) that manages fair and transparent procurement processes. However, by its own admission, Treasury has increasingly allowed non-competitive bids under exceptional circumstances for the sake of services delivery. Deviation rules allow SOEs to use existing contracts without requesting new bids from suppliers. Emergency expenditure programs to address Covid-19 have ballooned the already-high debt-to-GDP ratio and placed into question many large developmental infrastructure projects.
U.S. firms entering this market must contend with a mature and competitive market marked by well-established European and Asian competition. A trade agreement between SADC and the European Union enables many European products to enter South Africa duty-free or at lower rates than U.S. products. The United Kingdom signed a similar agreement last year that will also impact U.S. exports.
The volatile Rand-dollar exchange rate can complicate planning, especially for smaller or new-to-market firms. Although forward cover is readily available, and the Rand is one of the most heavily traded currencies in the world, the cost does reflect interest rates, which tend to be higher than in United States and developed markets.
South Africa has an unreliable energy supply with disruptions causing severe “Load Shedding” or blackouts. For businesses, unreliable electricity results in increased running costs and reduced productivity and profitability. The power outages in South Africa are a leading inhibitor to investment and growth and are a severe drag on the economy.
U.S. companies seeking to do business in South Africa will need to adapt to Broad-Based Black Economic Empowerment (B-BBEE) policies. These policies aim to redress economic imbalances among historically disadvantaged communities to facilitate socio-economic transformation through granting procurement preferences on government contracts (including SOEs), based on a company’s level of B-BBEE achievement. Procurement preferences and other benefits are based on a company’s B-BBEE certification level which it receives through a scorecard assessing points based on equity ownership, management control, skills development, and socio-economic development. Foreign companies often do well on the skills development and socio-economic development criteria. Equity ownership and management control may present greater challenges. A few foreign companies have addressed the ownership element of B-BBEE by negotiating “equity equivalency” programs with the Department of Trade, Industry, and Competition (DTIC) that emphasize the training and development of local companies. Also see Selling to the Government below.
The South African Government is continuously changing the mandatory industrial localization requirement for foreign suppliers that are often viewed as a cost and risk factor for doing business in South Africa.
The South African Government has continued to tighten labor and foreign ownership laws and mandated industrial localization. Sectors of specific concern include the extractive industries, security services, and agriculture. The South African Government (SAG) is pursuing a qualified policy of Expropriation of Land Without Compensation (EWC) that is constitutionally sound and will not endanger food security.
Due to the poor state of the public education system, skilled labor can be difficult to find in many technical and professional segments despite steadily increasing unemployment. While the pre-Covid-19 nominal unemployment rate is above 29 percent, including those who have given up looking for a job raises it to 37 percent. In addition, HIV/AIDS affects approximately one in ten South Africans with negative implications for labor availability, productivity, and healthcare costs.
Droughts 2016 saw a 104-year record drought in the central and northeastern part of the country come to an end, but water scarcity will remain a major concern for agriculture, power generation, and human consumption. The Western Cape Province still has a water deficit and authorities limit water consumption.