South Africa Investment Analysis

Contents
I. Overview 2
II. Economic/ Financial System 2
III. Politics 3
IV. U.S. Relations 4
V. SWOT Analysis 4
VI. Demographics/Labor Force 5
VII. Outlook 6
VIII. Investment Decisions and Conclusions 7
IX. Works Cited 8

I. Overview
South Africa is the most southern country on the continent of Africa with a population of nearly 52 million. Much of its most recent history has been shrouded in the racial segregation movement known as Apartheid. After years of struggle, South Africa held its first post-Apartheid election in 1994 and began the current democratic system (CIA, 2014). South Africa has the most diversified and industrialized economy in Africa. There has been moderate economic growth in recent years, but the financial crisis in 2009 significantly stunted the economy. Unequal distribution of wealth and racism are still very prevalent in their society. Public corruption, crime, and unemployment rates are ongoing threats to the economy and livelihood of the citizens.
II. Economic/ Financial System
The economy of South Africa relies on agricultural products like sugar, fruit, wool, and corn (CIA, 2014). It is internationally known as a wine exporter and its most significant exports are mining properties such as platinum, chromium, gold, diamond, and coal productions. Other successful industries include automobile assembly, textiles, iron and steel production, and chemical synthesizing (IHS Global, 2013).
The South African rand (ZAR) has had relatively volatile returns in the foreign exchange market but it is generally viewed that the rand has a strong correlation with the commodities market of precious metals due to South Africa being the world leader in gold and platinum production (Reserve Bank, 2014). Because of recent currency depreciation South Africa may have the opportunity to increase job production because of increasing exports (McGroarty, 2014).
South Africa faces a number of economic challenges. Foreign sources are often sought out for financing credit due to low local savings rates. Spending deficits have increased in the past five years along with government debt (Business Monitor, 2013). South Africa is also challenged to educate its rising population; an uneducated workforce hinders economic growth. With limited access to social services, high unemployment, and under developed infrastructure, the economy is slow growing. According to the IMF, “distortions of demand, supply, and pricing in the labor market, together with other market imbalances, have undermined South Africa’s economic production potential and contributed to preserving inequality and unemployment.”

TABLE 1: Snapshot of South Africa and U.S. Economies

S.A. 2013 S.A. 2012
U.S. 2013
GDP
$595.7 billion
$584 billion
$16.72 trillion
GDP-real growth rate
2%
2.5%
1.6%
Industrial Production Growth
0.9%
-
2.5%
Labor Force
18.54 million
-
155.4 million
Unemployment Rate
24.9%
25.1%
7.3%
Inflation Rate
5.8%
5.7%
1.5%
Exchange Rates (U.S.)
9.576
8.2031
-
(Source: CIA World Factbook) Internal structure and domestic dynamics of the economy may hinder international competitiveness for South Africa. The export sector of the economy produces a significant amount of wealth and is key to supporting industries and creation value for the nation. South Africa was able to bounce back from the global financial crisis in 2009 but the continuing European economic crisis led to a decrease in demand of South African products by European countries (Business Monitor, 2013). Expanded trade to China and other African nations has helped bridge this divide. Large growth is expected in the mining, telecommunications, and banking industries in coming years. South Africa’s global economic context can be indicated through foreign direct investment (FDI). Since the 1990’s, FDI flows have risen in South Africa, peaking in 2008 with a $9 billion investment (Business Monitor, 2013). Although recent investments have declined, South Africa has increased investments abroad. Divisions in politics, race, and class are thought to be the main limitations to FDI growth in the coming years.
South Africa is considered to be the base of sub-Saharan economic operations. The South African Reserve Bank is a politically independent body (Reserve Bank, 2014). The concentrated banking sector gets most of its exposure in the household finance and insurance sectors. Principal commitments of banking include improving access to financial services, employment equality, skills development, and achieving targets of Black Economic Empowerment (Reserve Bank, 2014).
The role of South Africa in the world economic arena has increased in recent years. By hosting events such as the 2011 U.N. Climate Change Conference and 2010 World Cup, South Africa positioned themselves squarely on the world’s stage. In 2010, South Africa was invited to join the political and economic grouping known as BRICS (HIS Global, 2013). This grouping helped to further expand Chinese/African relations and enabled China to become South Africa’s largest trading partner. III. Politics
South Africa’s major governing political party is the African National Congress Party (ANC). In 2009, parliament elected Jacob Zuma as president, he was reelected again in 2012. The Zuma Administration has publicly pursued a free market economy aimed at spurring growth. Investments have been made to support skills training, create service jobs, strengthen infrastructure, and lower unemployment (CIA, 2014). In 2010, the “New Growth Plan” was enacted as a growth strategy centered on industrial policies with plans to increase economic output, job creation, and increase employment (Congressional Research, 2013). The five main areas of interest in this plan are: energy, transport, water, communication, and housing. Other areas such as agriculture, manufacturing, tourism, and mining were also a large focus of the plan. This agenda has led to the highest ever South African budget. Critics became skeptical of the government’s ability to carry out the plan. After a year of unrest and corruption, the country’s economic risk rating was downgraded. This led South Africa to seek international funding from China because financial investment opportunities became too expensive for Western intuitions (Business Monitor, 2013).

IV. U.S. Relations
South Africa plays a large role in the African Union because of its political, trade, and investment ties across the continent. The U.S. and Africa are considered strategic allies despite current foreign policy differences. In 2013, U.S. President Barack Obama visited South Africa to discuss investment, trade, and development partnerships (Congressional Research, 2013). Both countries look to increase trade to help spur growth in their respective economies. The public spending done in South Africa has led to new marketing opportunities for the U.S. business sector. The U.S. has financed many large projects in South Africa in the past few years including locomotive manufacturing deals, coal power plant expansions, and financing opportunities for South Africa to purchase U.S. goods related to clean energy production (Congressional Research, 2013).
South Africa is the U.S.’s largest trade partner not focused on oil. Trade between the two countries has increased by over 200% in the past decade. Since 2003, trade between U.S. and South Africa has increased from $7.7 billion to $16.2 billion (Congressional Research, 2013). South Africa is now the 35th largest importer of U.S. goods such as machinery, aircraft engines, precious metals, and vehicles. South Africa has now become the 40th largest source of U.S. imports with goods such as iron/steel, machinery, precious metals, and vehicles (Business Monitor, 2013). Increasing U.S. Foreign Direct Investment has focused on manufacturing, chemical development, transportation equipment, and wholesale trade (US/SA trade). Recent concerns over competitive threats in Africa, such as China, may be a reason for heightened interest by the U.S. in South Africa.
In February 2013, the U.S.-South Africa Business council was formed by the U.S. Chamber of Commerce in conjunction with the Obama Administration’s “Doing Business in Africa” plan (Congressional Research, 2013). This effort aims at promoting trade, investment, and financing in South Africa and the entire continent of Africa. Shared support of democratic values and economic growth goals strengthens the trading bond between the two countries while foreign policy issues are the main conflict between them. South Africa has often positioned themselves alongside developing countries that may go against U.S. interests. These differing alliances include relations with Cuban and Palestinian leadership. Since the Obama Administration, South Africa has become more aligned with U.S. concerns. Cooperation in areas such as defense and development continue to strengthen the close trading ties. This trend of cooperation stems back to the end of Apartheid when South Africa became the leading recipient of U.S. foreign aid (CIA, 2014). This assistance has declined over the years but with economic cooperative plans in action support will continue.
V. SWOT Analysis
Strengths
Business infrastructure is some of the most modern in Africa, helping South Africa to serve as a financial and business center for the entire continent.
The African National Congress party remains dominant in popularity which promotes political stability and policy continuation.
The ANC’s fiscal policy has promoted increased expenditures during slow growth periods.
Large amounts of rich minerals are located within the borders of South Africa.
The banking system of South Africa remained stable amid global recession.
Weaknesses
Decades of poor education structure has resulted in a skills deficit for workers.
Current levels of FDI are slowing with sluggish growth in the economy.
High levels of HIV infection rates provide a bleak picture for long term growth.
South African currency (Rand) has been volatile in recent years.
Opportunities
South Africa’s trading relationship with Europe and Asia can serve to help increase exports.
The U.S. and South Africa can continue to work together to establish South Africa as a manufacturing hub.
Increased growth rate and education reform will help long term economic growth with improved skills.
Threats
The Black Economic Empowerment movement passed by the government sets industry standards for ownership of equity, management involvement, and skills development which may cause slow growth in the short run.
The threat of HIV effects the economy by becoming active in patients during their most economically productive years, increasing social costs.
(Sources: Business Monitor, Wall Street Journal, CIA World Fact book, and IHS Global)

VI. Demographics/Labor Force

Nearly 65% of South Africa’s population is between the age of 15-64 years old (CIA, 2014). It has the third highest literacy rate in Sub Saharan Africa despite the poor education system (IHS Global, 2013). The labor system is not only compromised by lack of education but also by the HIV/AIDS pandemic which actively affects the productive sections of the labor force. Over the past decade South Africa has introduced a large number of labor legislation pieces. One of the main initiatives is the Black Economic Empowerment (BEE) which is concerned with improving employment opportunities for the black population (IHS Global, 2013).

Figure 1: South African Population Distribution

(Source: CIA World Fact book)
A high level, about 30%, of the active workforce in South Africa is unionized (Business Monitor, 2013). Many strikes and other industrial actions have slowed down economic sectors, even with high unemployment. The business community of South Africa has expressed concern over unions and over regulation of the labor market. Governmental plans to deregulate labor restrictions may help stimulate economic growth but a largely unskilled workforce may impede this progress. Legislation of the labor market will be key to South Africa’s growth in the future.

VII. Outlook
The future remains bright for South Africa as it hopes to remain politically stable. Real growth will depend on the government’s ability to deal with dissatisfaction amongst miners, residents of townships, the unemployed, and concerned citizens. Uncertainty surrounds government performance because of high crime rates, corruption, and unemployment rates. Despite these challenges the economy of South Africa is diverse and large. Its ability to expand in coming years may be moderate due to the stunted world economy. Future prospects in sub Saharan Africa may stimulate the South African economy because of investment and trading ties. United States trade with South Africa will most likely continue to grow. Increased demand of goods and economic growth along with U.S. efforts to expand trade and investment will further secure this trading partnership.
The success of many of the social and economic policies in South Africa is sometimes overshadowed by the long term economic problems reflected in the historical racial disparities. Income level growth is slower than other emerging markets. The higher level of unemployed workers in comparison to other emerging markets puts more stress on the country and increases social tension. Educational problems in South Africa may be at the heart of the problem as unequal incomes and racial disparities create large education gaps. The slower rate of economic recovery can also be attributed to a weak demand for exports, currency overvaluation, international financial crises, and household debt burdens. These socio economic problems make the South African economy vulnerable to capital flight (McGroaty, 2014).
Economic slowdown in China and reduction in the gold mining sector forecast slow economic growth. Because of recent industrial unrest this trend will likely continue well through 2014. During 2013 several groups of workers went on strike; most widely known was the National Union of Metal Workers of South Africa (McGroaty, 2014). This obstruction to the industrial sector greatly disrupted the automobile industry. There are high levels of investment spending and development of infrastructure that are expected to greatly expand the market in the future.

VIII. Investment Decisions and Conclusions
South Africa is one the most sophisticated and diverse emerging markets because of its connection with the rest of the continent of Africa. With its recent introduction to the BRICS group it has expanded trade with other major emerging markets. Its demographic profile provides opportunity for expansion in the job sector. Natural resource wealth plays a large role in South Africa’s economy, with influence on its currency. Manufacturing and overall infrastructure has been getting heavy investment which will result in economic growth. Its financial and legal sectors are highly developed and bring in operations from around the world. Continued political stability should favor growth. South Africa is investing in its future with legislation that increases attention for issues like education, unemployment, HIV/AIDS, and work skills development.
Trade rules and investment incentives in South Africa provide enticing opportunities for finance that will help further expand the country’s levels of international trade. Even with slow growth projected for 2014, South Africa has the right mindset to greatly expand its role in the global economy. The future of South Africa will depend on increasing trade, a strengthening global economy, and continuing to expand their current infrastructure. South Africa has a correlation of 0.68 with the U.S., making it a decent choice for diversification (Bodie, Zvi, & Kane, 2013). Political and socio economic risks will always be present, but South Africa should be on every investor’s radar.
IX. Works Cited

Bodie, Zvi, Alex Kane, and Alan J. Marcus. "Globalization and International Investing."
Essentials of Investments. New York: McGraw-Hill/Irwin, 2013. Print.
Cook, Nicolas. South Africa: Politics, Economy, and U.S. Relations. Rep. Washington D.C.:
Congressional Research Service. Web.
McGroarty, Patrick. "South Africa's Central Bank Warns of Capital Flight Risk." The Wall Street
Journal. Dow Jones & Company. Web. 18 June 2014.
McGroarty, Patrick. "South Africa's Finance Minister Sees Strikes Weighing on Growth." The
Wall Street Journal. Dow Jones & Company. Web. 18 June 2014.
Oberholzer, Ronal. Country Intelligence Report. Rep: IHS Global. Web.
South Africa Business Forecast Report. Rep: Business Monitor International. Business Monitor.
Web.
"South Africa." Central Intelligence Agency. Central Intelligence Agency. Web. 15 June 2014.
"South African Rand - Forex Walkthrough." Investopedia. Web. 18 June 2014.
"South African Reserve Bank." Reserve Bank. N.p., n.d. Web.