Eleneus Akanga
Corporate Risk
Risk Profile: South Africa | Canadian Insurance
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Risk Profile: South Africa

How crime and corruption have taken some shine off Africa's jewel

It was a little more than a year ago that Idris Elba portrayed Nelson Mandela in a feel-good biopic for Hollywood, complete with an uplifting pop tune in the trailer: “Wavin’ Flag” by Canadian artist K’naan, who actually wrote the song about his birth country, Somalia. 

But today’s South Africa is no longer the nation of the hero who took a long walk to freedom. Unsafe streets in Johannesburg. Labour unrest across the country. And, for those in the know about South Africa’s political culture, the ANC lost its halo a long time ago. Martin Plaut, a white South African who reported for the BBC and who was involved in the 1976 Soweto uprising, arguably knows the country better than anyone else. He’s been particularly relentless in holding the ANC accountable: recently, in his blog, he wrote that President Jacob Zuma has 700 allegations of corruption hanging over his head. He also notes there “were 16,259 murders in 2012/13 – or nearly 47 a day. Rape is at epidemic proportions, as is robbery. Yet there is no indication that the ANC, or Jacob Zuma, has the slightest idea what to do.” Still, Plaut keeps a guarded optimism, citing “great businesses” like Anglo American and how South Africa is “lekker. There is hardly a week without a festival or participatory sporting event of some kind.” Lekker, by the way, is South African slang for “cool.” 

For five years, Eleneus Akanga has written on the politics and business of different African countries, including Uganda and Rwanda, and his reporting has taken him across Europe as well. Here is his Passport to South Africa.

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There are so many reasons to feel good about South Africa, said a friend of mine when I called to ask how he was faring. “This is such a cool place; even winters have sunshine,” he told me. Thirteen years ago, Charlie Phillips swapped his high life as an insurance broker in London for Joburg. A year later, he bought a small winery and started making the red stuff.

“Do not forget that in the years following the late Madiba’s release, this was the place to be. I wanted to be part of something new,” he adds. And who can blame him. For years, South Africa, buoyed by extended periods of stability, good will and trusted institutions, was Africa’s top investment destination, especially for mining.

No major Canadian mining firms are there now, but it might be only a matter of time. After all, 75 percent of the world’s mining companies have a maple leaf address. And, according to Natural Resources Canada, there were 155 of our companies—with a combined total asset value of $31.6 billion—operating in 39 other African countries in 2011.

“Canada is a pretty large outward investor,” says Pierre Gratton, president and chief executive of the Mining Association of Canada.

Nic Borain, an independent political analyst currently consulting with BNP Paribas, is convinced that there are three major risks to think about when it comes to investing in South Africa. “Unpredictability in relation to government economic policy interventions; escalating social unrest and the looming danger of an Arab Spring-type event; and the tension between ambitious government plans and [a] narrowing fiscal pace.”

Across the globe, the tendency to lump all African countries together in a single negative stereotype has had its consequences, and investors do worry about the unpredictable state of affairs on the continent. But their nerves are particularly tested with South Africa, still one of the prime investment destinations.

The South African government’s continued interventions in the mineral and exploration sector—especially with regard to new taxes, price setting and export restrictions—have left many investors anxious. There’s also widespread concern throughout South Africa about increased government interference after the Africa National Congress’s Mangaung Resolution, which gave ministers more powers to intervene where they want, and without institutional oversight, on matters relating to telecommunications, the labour market, liquid fuels and the Black Economic Empowerment program.

Part of the trouble in South Africa is that, over the years, the ANC has engaged in what some political and economic commentators call “populist policies.” A local political commentator I spoke to, but who did not want to be named, says there were people within the ANC who strongly believe that what the government is doing is the “absolute right thing to do.

“Let’s not forget that the Mangaung Resolution [on anti-corruption in 2012] was adopted at an ANC conference. It was seen as the solution to social economic transformation. While its drafter may have been well-meaning, the lack of a coherent strategy in the implementation of its resolutions has meant that government policies related to it often appear ad hoc, incoherent and uncoordinated. This worries investors.”

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According to Nic Borain, when it comes to investor confidence, very little is being done to provide assurances, and that the ruling government has appeared, quite often, as if it is in a scramble to formulate policy. This, he says, “puts pressure on investment, employment and output in all sectors. For example, nationalization may be off the agenda, but it has been replaced by a policy push that hopes to exploit private companies through regulation and other forms of pressure, all in the name of achieving government (and party) targets of employment, revenue generation, and service delivery.”

South Africa also has a lack of skilled labor. In 2013, the Adcorp Employment Index (South Africa’s primary source of employment data) revealed there’s a substantial skills shortage. There are currently as many as 829,800 unfilled positions for high-skilled workers across a wide range of occupations in South Africa—the most affected categories being senior management, medicine, engineering, accounting and the law. The country also needs thousands more specialized technicians and artisans.

Loane Sharp, Adcorp’s labour economist, said in an email that “Sector Education and Training Authorities (SETAs) have consistently failed to produce credible estimate of skills shortages in their respective sectors. As a result, the National Skills Fund has yet to disburse more than R3.5 billion (about C$356 million) in funds available for skills development. It is a problem.”

The problem has been compounded even further by restrictions on foreigners living and working in South Africa—a measure ironically put in place to help keep local jobs for the locals. Recent amendments to 2011’s Immigrations Act prohibit the use of immigration agents and quota work permits, both of which have been widely used by South African companies seeking foreign skills.

Companies have struggled to cope with skyrocketing skilled workers’ wages, which have gone up in inflation-adjusted terms by a mammoth 286.4 percent since 2000.

As a result, companies have struggled to cope with skyrocketing skilled workers’ wages, which have gone up in inflation-adjusted terms by a mammoth 286.4 percent since 2000.

“It seems extraordinary that such an increase could largely have escaped attention, except that the increase would have been in the interests of skilled South African workers at the expense of the economy as a whole,” says Sharp.

Pickets and Politics

Set up shop in South Africa, and you’ll face some powerful shop stewards. Just this year, a series of workers’ strikes, first involving platinum workers and then the association of metalworkers, threatened to bring the nation’s economy to its knees, holding manufacturers for ransom over pay and working conditions. With about 70,000 workers hitting the picket lines, the strike lasted five months and cost the mine companies US$2.3 billion. Anglo American Platinum was forced to sell its mines, while Lonmin, the world’s third-biggest platinum producer, has hung on.

But a crisis like this is enough to chill the enthusiasm of major foreign investors. Back in July, Ford was considering closing operations in South Africa over what it described as an “unstable labor environment.”

The power and ease with which the unions were able cause chaos has, as mining consultant Peter Major puts it, reinforced “a perception that a lot of people have had for decades: that South Africa is a risky place to put your money.”

Under President Jacob Zuma, the ANC has increasingly drawn criticism for ignoring widespread inequality. According to Reuters, despite South Africa’s per capita GDP of more than $8,000 a year, an estimated 40 percent of the population live on less than $3 a day. And, the World Bank says, income distribution in South Africa today is more unequal than at the end of apartheid in 1994. Disillusioned and hopeless, some South Africans are resorting to violence and crime to make ends meet. Some analysts have described Johannesburg as one of the most dangerous cities in the world that’s not at war.

Police minister Nathi Nhleko, who has spoken of the need to find a broader solution to murder and attempted murder in the country, conceded on the day the statics were released that the level of violence in the country is high.

Since the beginning of the year, the rand has been in freefall, driving up food prices and the cost of doing business. In December 2013, on the news that Reserve Bank deputy governor James Cross was retiring due to ill health, the rand lost more than 30 percent of its value against the U.S. dollar. According to the Mail and Guardian, a South African daily, the value of the currency has been decimated, in part because of the exodus of South African companies overseas.

The economy is weak. GDP rose at an annualized rate of just 0.9 percent in the third quarter, the slowest rate for four years and a dismal pace for a middleincome country. South Africa also has a high level of personal debt, so even a small increase in interest rates can have a big impact on many households.

“The trouble is that people feel freer to be corrupt if they sense that people at the top are getting away with it. And this cuts across the board, whether it be at provincial or local levels.”

“The government feels threatened,” says Prof. Thomas Wolfgang, who lectures at the economics department of the University of the Western Cape. “With local elections coming up in 2016, the government has been careful not to take sides, well aware of the potential repercussions at the polls were it to be seen by voters as being pro-big business.” Apparently, the ANC does privately agree that investors need some reassurances, but publicly it has to appear to be pro-union. After all, companies don’t vote; union members do.

There is also a genuine concern that the government is deliberately refusing to address the issue of corruption, particularly to benefit the politically connected. To make matters worse, South Africa slid on Transparency International’s perceived corruption gauge from 38th in the world in 2001 to 72nd in 2013. A raft of legislation proposals put forward by the ANC government to tackle corruption have been criticized by anti-corruption campaigners as “utterly useless.”

“The trouble is that people feel freer to be corrupt if they sense that people at the top are getting away with it, “ says David Lewis, head of Corruption Watch, a privately funded watchdog based in Johannesburg. “And this cuts across the board, whether it be at provincial or local levels.”

All this has made the rating agencies skittish. In June, Fitch changed its outlook on the country from stable to negative, attributing the change to the impact of the strikes. S&P followed suit, almost immediately, downgrading the South Africa’s sovereign credit rating by a notch to BBB. The downgrades have caused a bit of a stir, and analysts are warning that further ones could damage an already stretched economy.

Setting up in South Africa

Globally, South Africa stands at 64th in the ranking of 189 economies based on the ease of starting a business, according to the latest World Bank Doing Business Index. It takes between one to two days to open a bank account, 12 days to register for income tax and VAT, and four days to register for unemployment insurance. Public services are still wrapped in a lot of red tape.

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Foreign nationals who want to establish their own business or a partnership in the country must, apart from having sufficient funds to support themselves and their family, be able to invest at least R2.5 million in the business. The funds must originate overseas, be transferable to South Africa, and belong to the applicant (that is, come from the applicant’s own bank account). The business also has to commit to the creation of jobs for South African citizens. After six months to a year, proof will need to be submitted to prove the business is employing South African citizens or permanent residents, excluding family members of the employer.

I asked Prof. Wolfgang what he made of foreign investments in South Africa, given recent developments. “An optimist might say that the current crisis in South Africa can be explained as being part of a process,” he says. “I personally think that downgrading is rational. The real question is the effect it will have on this country’s economy. South Africa has always had high interest rates. The risk is that, as they continue to get higher, many businesses will consider making their way out.” Wolfgang believes that continued economic uncertainty and excessive power vested in trade unions are increasingly making South Africa less attractive to investors—at a time when the country badly needs more investment. South Africa was once regarded as a favourite investment destination given its stability and credit worthiness, but other countries are now proving more favourable. Zambia, Kenya, Uganda, Angola and the slightly more stable parts of the Democratic Republic of Congo (DRC) are gradually attracting would-be South African investors, such as BRC DiamondCore, El Niño Ventures Inc., First Quantum Minerals and ICS Copper Systems Ltd., to mention a few.

To Wolfgang, the balance of power is shifting and the current crisis in South Africa can only worsen the situation. “Medium companies are looking at other African countries. This place is no longer the investment hub it was twenty years ago.”

But does this mean everyone will leave? “Not yet, perhaps,” says the professor. “Most companies are taking this as a warning signal. Many (companies) are unwilling to act in haste, but there is a general feeling that it won’t be long before the same companies start relocating to new and more promising investment destinations on the continent.”

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Copyright 2014 Rogers Publishing Ltd. This article first appeared in the November 2014 edition of Corporate Risk Canada magazine