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Successfully investing in South Africa

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last updated on 16 June 2023 | reading time approx. 5 minutes

 

 

 

How do you assess the current economic situation in South Africa?

South Africa is in a difficult economic situation. The entire economy is suffering from the ongoing and worsening energy crisis. Controlled power cuts ("load shedding") have increased sharply in the last year. In the first four months of 2023, there was only one day without load shedding. In addition to load shedding, the South African economy is also impaired by ongoing corruption and mismanagement. 

The energy sector has been an important area for government support. Increased attention is being paid to renewable energies ("RE"), which are to be significantly strengthened in the country, among other things to combat load shedding. Due to its climatic situation, South Africa offers very good conditions that can contribute to an environmentally friendly energy supply and positive economic development.
 
Due to South Africa's well-positioned agricultural sector and strong food production, South Africa is only dependent on imports to a limited extent and food prices have risen less drastically in international comparison. Despite the current low economic growth, South Africa remains one of Africa's central economies and Germany's most important trading partner in Africa. Around 600 German companies are active in South Africa.

 

How would you describe the investment climate in South Africa? Which sectors offer the largest potential?

For German companies looking to invest in the sub-Saharan region, South Africa remains an attractive business location and gateway to other markets on the continent. Currently, the energy sector, especially RE, but also batteries and inverters offer very good market opportunities. Municipalities, industry, companies and private individuals are very interested in independent power supply solutions due to the intensive load shedding phases and there are long waiting times for installations. The tax reliefs for PV solar systems for companies and private individuals, which was introduced at the beginning of 2023, also create a further incentive for this sector. The infrastructure sector also offers great potential and the South African government plans to involve the private sector more closely in this sector in the future. 

The traditionally important mining sector offers very good prospects for foreign companies. Especially the rising commodity prices, partly due to the strong demand from the People's Republic of China, and the increasing interest in the precious metal platinum (which is an important component for hydrogen-based propulsion technology) predict good economic prospects for the mining sector. This means that the raw materials industry should continue to grow. 

The manufacturing industry (including food processing and packaging, the beverage industry, fertiliser production), automobile production, petrochemicals, medical technology and telecommunications also show great potential for German companies. 
 
Potential future markets are predicted above all in the areas of e-mobility, the production of smart textiles, IT services (e.g. business process outsourcing), agrobusiness, renewable energies, recycling, sustainable construction and the production of biofuels. In addition, there is the rapidly advancing digitalisation, especially in the areas of agribusiness, health, education, information and communication technology (mobile radio networks, cloud solutions), trade and e-logistics.

 

What challenges do German companies face during their business ventures into South Africa?

One of the challenges for German companies in South Africa is "Broad-Based Black Economic Empowerment" (B-BBEE). B-BBEE pursues the goal of involving the previously disadvantaged population more strongly into the South African economy. German companies should consider B-BBEE at an early stage because an appropriate B-BBEE structure requires time, expert advice and often a local B-BBEE partner. Although B-BBEE is certainly a challenge for German companies, B-BBEE is an integral part of South Africa and should also be seen as an opportunity to participate in the country's transformation.  

The legal situation in immigration law also remains critical and secondments of employees from Germany must be planned and organised well in the long term.
 
Other challenges are the country's volatile currency and load shedding. 
 
One challenge for the automotive industry is to adapt to market developments and sales markets and to invest more in electromobility. At the same time, the shortage of qualified – foreign – skilled workers is particularly noticeable in the automotive sector. The necessary transfer of know-how from the companies' headquarters in Germany, among other places, is only taking place to a very limited extent.
 
The commencement of the German Supply Chain Compliance Obligations Act (LkSG) on 1 January 2023 means a further challenge for the German companies concerned that have South African suppliers. They will have to rethink their global supply chains and, if necessary, reposition themselves. For South Africa, the following due diligence obligations of the LkSG are of particular importance: prohibition of unequal treatment in employment and worker safety. In terms of worker safety, the risk of inadequate training plays an important role in South Africa.

 

Is the end of the load sheddings in sight?

In politics, there is always the prospect of an end to load shedding. The City of Cape Town, for example, has set itself the ambitious goal of ending load shedding within the next three years. The strained national power utility "Eskom" itself says that load shedding will continue until 2027.

 

An important hurdle in the fight against load shedding was overcome at the beginning of the year. Since the beginning of 2023, RE projects no longer need a power generation license, regardless of the size of the power generation plant. In the past, the requirement for a power generation license was one of the main obstacles for independent power producers. With the improvement of the legal framework, we see a clear increase in the interest of German companies to enter the South African market. However, as these new projects take time, it can be assumed that load shedding will accompany South Africa for some years to come.   

 

There are other problems that prevent the end of load shedding. In times of power cuts, copper cables and other materials of the country's electricity grid are being stolen daily and need to be replaced continuously. Mismanagement and corruption within Eskom also dampen the hopes of an end to load shedding.

 

In your opinion, how will South Africa develop?

It can be assumed that the share of independent power producers will increase strongly and that the RE sector will contribute to boost the economic growth of the entire country.

The tourism industry will quickly recover from the losses caused by the pandemic, as South Africa is once again an interesting destination, especially for Germans. Not only as a holiday destination, but also increasingly as a desired location for many German employees due to the new home office trend. It is to be hoped that South Africa will make use of this opportunity by introducing a suitable “remote working visa". 
 
The Pan-African Free Trade Area opens opportunities for African and European countries and thus also for South Africa as a hub for German investors. 
 
It remains to be seen whether there will be any political measures and further impulses to stimulate the economy in view of the next elections. President Ramaphosa will endeavour to present a positive balance sheet regarding economic developments at the end of his current term. Particularly in view of the competing political camp, this aspect will be decisive in determining whether Ramaphosa can maintain his current course for the further development of South Africa. In any case, opening the South African market for qualified foreign workers and further regulatory relief for the energy and infrastructure sectors would be beneficial.

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