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Assessing and promoting civil and minority rights in South Africa.

[Source: South African Monitor by Heinrich Matthee.]

The safety and prosperity of citizens and communities in South Africa are relevant to several European and German stakeholders. The analysis here focuses on Germany, but will be relevant for many other European businesses and NGOs too.

South Africa’s relevance to Germany

Successive German governments have considered South African governments to be their main strategic partner in trade, politics and security in sub-Saharan Africa. Approximately 1.24 million German tourists visited South Africa between 2011 and 2015, with about one in three being repeat visitors. Natural beauty, the often sunny weather and mild winters, wildlife, beaches and cities, heritage and the quality of life have convinced many to also live in South Africa.

South Africa has more than 56 million people and eleven major cultural communities. About 1 million of South Africa’s 56 million people also claim some German descent. [1] Tens of thousands speak German as their mother language, with communities and community institutions including German schools, social clubs and churches.

At present, about 100 000 German citizens are resident in South Africa, including about 3 000 pensioners. Major concentrations are found in Johannesburg and Pretoria. However, about 60% are resident in the Western Cape province, which deserves special attention by German business and NGOs.

Business opportunities

More than 600 German companies are active in South Africa, providing employment to about 90 000 people. Germany is the second largest trader with South Africa after China, with a trade volume of R180 billion (14 billion Euro). German investment in South Africa exceeds R81 billion (6.6 billion Euro).

Five major areas of business opportunities are identified in a McKinsey Global Institute report entitled South Africa’s big five: Bold priorities for inclusive growth. [2] They include service exports, advanced manufacturing, infrastructure, natural gas and the agricultural value chain. Vocational training and university education may also constitute smaller, but worthwhile opportunities.

Economic growth coupled with growing consumer markets are evident in many parts of sub-Saharan Africa. Foreign investors tend to gravitate towards the larger, more diverse economies in Africa, such as South Africa in the south, Morocco and Egypt in the north, Nigeria in the west and Kenya in the east. Collectively, these markets attracted 58% of the continent’s total FDI projects in 2016.

According to the EY Africa Attractiveness Report in 2017, South Africa retains its appeal as a launching platform for business activities across the continent. It still leads the continent in FDI projects. In the consumer products and retail sector, projects more than doubled from 19 in 2015 to 41 in 2016. [3]

Political instability and economic policy uncertainties

To benefit from the above-mentioned opportunities, business and NGOs have to monitor and master several challenges in South Africa. Under the scandal-ridden rule of President Jacob Zuma of the African National Congress (ANC), the country is experiencing political and economic volatility. [4] In September 2017, the monthly business confidence index in South Africa fell to the lowest level since the mid-1980s as political scandals and policy uncertainty continued to weigh.

Factional infighting, frequent changes to cabinet members, fast shifts in policy priorities and the influence of powerful, but opaque informal networks around Zuma have increased economic policy uncertainties. Since 2009, to ensure his hold on power and play potential contenders off against each other, Zuma has made more than ten cabinet reshuffles and 132 changes to the national executive.

The major “Guptagate” scandal continues to haunt the Zuma government. [5] The Indian Gupta family, which is close to Zuma and some of his close relatives, have been accused of also using their connections to gain lucrative state contracts and influence the appointment of ministers too.

As the ANC had lost control of cities like Nelson Mandela Bay and Johannesburg in the 2016 local elections, Zuma has increasingly turned to provincial and local political strongmen and rural constituencies to prop up the electoral dimensions of his rule. [6] These power shifts may also influence the negotiation of business deals in some cases.

International businesses drawn into the fray

International corporations have also been damaged or even ruined following exposure of their complicity with nepotistic and corrupt networks around Zuma. It has been revealed that the German-based SAP paid bribes of several million Euros to Gupta-linked entities in order to secure contracts at Transnet and Eskom. SAP has suspended its management team in South Africa. [7]

The FBI has opened an investigation into US links to the three Gupta brothers. US investigators have in recent months started probing individuals, bank accounts, and companies in the US for ties to alleged graft involving the Gupta family.

The UK government has also asked financial enforcement agencies to investigate possible ties between HSBC and Standard Chartered and the Guptas over concerns about their exposure to potentially illicit funds. Philip Hammond, the UK Chancellor, said in a letter to Lord Peter Hain that he would pass on the former Labour Cabinet Minister’s concerns that the UK banks might have handled illicit funds linked to the family via Hong Kong and Dubai. [8]

Bell Pottinger, a major PR company, collapsed after it had become known that it had run a social media campaign on behalf of the Gupta brothers. [9] The campaign targeted so-called white monopoly capital, using the race card and scapegoating. This is a diversion tactic often used by ANC sections to divert attention from the impact of ANC power abuse and mismanagement on South Africa’s economic and political turbulence.

Compliance with the regulatory and legal systems of their home country has always been important, but has also become a politicized issue in South Africa. International business will have to take this into account.

More government interventionism

The succession race to replace Zuma as ANC leader and the run-up to the 2019 national election will increase political turbulence. The ANC is due to hold a conference in December 2017 to choose its new leader, and several factions are jostling for power. “Radical economic transformation”, a vague slogan for wealth redistribution, has thus emerged as the key rallying point for the two main factions led by Deputy President Cyril Ramaphosa and Nkosazana Dlamini-Zuma respectively.

In September, ratings firm Moody’s warned that proposed plans by the ANC government to implement “radical economic transformation” could deter investors. Moody’s referred in this regard to ANC plans for land redistribution, preferential procurement and other forms of affirmative action: “Some proposals, such as the recently drafted Mining Charter, present risks to growth by reducing regulatory stability and further undermining investor confidence”. [10]

The revised mining laws, published by the Minerals Ministry in June 2017, require companies to increase their black ownership from 26% to 30%, or possibly see their licenses revoked. In terms of the Charter, mining companies will need to pay 1% of their annual turnover to the 30% black ownership before distribution to shareholders. [11] For the time being, its implementation has been suspended after a lobby group challenged it in court.

Factional struggles, political uncertainty and shrinking resources will reinforce economic interventionist measures by ANC policymakers. They will be under pressure to find resources to sustain themselves and their patron-client networks.

Weaker investor protection

In past years, the ANC has already proceeded with several statutes and bills that increase the government’s interventionist powers. Examples include regulations, policy initiatives and legislation regarding investment, expropriation, energy, the security industry, landownership, and racially-based empowerment in all dimensions of corporate value chains. [12]

Business may sometimes encounter government attitudes of entitlement and limited recognition of international property rights. [13] Bilateral Investment Treaties (BITs) previously provided protection to German and other European investors, including rights to international arbitration in case of creeping or direct expropriation. However, the ANC government decided not to renew the BITs for countries like Germany.

Investor caution is reinforced by weaker protection of investor rights to international arbitration in the ironically-named Protection and Promotion of Investment Bill (PPIB), which was signed into law by Zuma in 2016. The South African German Chamber of Commerce and Industry, [14] as well as US and EU trade associations have commented that the new situation would raise the risk of foreign companies and their risk insurance premiums.

Government income gap and higher taxes

Widespread corruption in the bloated state bureaucracy, extensive welfare grants and costly bailouts of mismanaged state-owned enterprises (SOEs) have played an important role in high state debt. However, few state projects have significantly increased labour productivity. In October 2017, the IMF stated that “Growth is projected to remain subdued … despite more favourable commodity export prices and strong agricultural production, as heightened political uncertainty saps consumer and business confidence.” [15]

The 2017-2018 World Economic Forum Global Competitiveness Index noted that South Africa’s economy is nearly at a standstill, with GDP growth forecasted at just 1.0% in 2017 and 1.2% in 2018. Meanwhile the country’s unemployment rate is currently estimated to be above 25% and rising. [16]

In October 2017, Finance Minister Malusi Gigaba slashed growth forecasts and warned that fiscal deficits would be higher than expected for the rest of this decade. Government revenue is now forecasted to come in at about R50.9 billion less than the planned budget, which would be the worst government income gap since 2009. Gross national debt is projected to reach more than 60% GDP by 2022, with debt service costs reaching 15% of main budget revenue. [17]

Credit ratings agencies downgrades

In June 2017, the international credit ratings agency Moody’s downgraded South Africa one notch to BAA3 – one notch above sub investment grade. Moody’s placed South Africa on review for a downgrade in April 2017 after Finance Minister Pravin Gordhan and his deputy were sacked and replaced by pliable Zuma loyalists. In June 2017, rating agency S&P Global reaffirmed its sub investment grade at BB+. [18] Policy uncertainties also played a role in the ratings downgrade.

According to economists, continued low growth, in addition to increasing government debt and contingent liabilities could trigger more negative ratings actions. They note that the government is not performing well on a number of critical underlying indicators of governance, including political stability and government effectiveness, the performance of state-owned entities, control of corruption, and policy certainty.

Moody’s response to Gigaba’s mid-term budget has been that policy seems to have shifted away from the focus on fiscal consolidation. It is sceptical that a huge cut to state expenditure would be politically possible in the run-up to the 2019 national elections. [19] Another round of credit-rating downgrades remains possible. It could result in a significant international sell-off of South African bonds and further increase the cost of government borrowing and its debt burden.

Less trust and competitiveness

Business Unity South Africa (BUSA) President Jabu Mabuza has confirmed a breakdown in trust between business and governments. “We went all over the country and the world to say what the government says it is going to do to repay debt. We will generate the taxes, we will create the employment, we will invest and ensure these things can be done. The developments of the past few months have damaged that trust.” [20]

Lower confidence is also reflected by international business rankings. South Africa has dropped its ranking from 47 to 61 out of 137 countries in the Global Competitiveness Index of the World Economic Forum of 2017. Corruption, crime and theft, as well as government instability were cited as three primary reasons why the country had dropped 14 positions in the overall rankings this year.

Other factors related to the fall in the index include tax rates, inefficient government bureaucracy, poor work ethics of the national labour force, restrictive labour regulations, an inadequately educated workforce, inflation, access to financing, and policy instability. Although still relatively good in the African context, the country’s institutional environment (76th), financial markets (44th), and goods market efficiency (54th) are all rated as being weaker than last year. [21]

Foreign direct investment (FDI)

FDI is not reaching the levels that a country like South Africa should attract. According to the UN Conference on Trade and Development’s Global Investment Trend Monitor, FDI into South Africa plunged with 74% to $1.5 billion in 2015. This was a far steeper decline than the 31.4% decline on year in 2015 experienced elsewhere in Africa.

Research by the University of Johannesburg shows that the top 50 companies on the Johannesburg Stock Exchange currently hold more than 1.4 trillion rand in cash reserves, which is not being invested until a new government has been elected and formed in 2019. Local businesses have continued to move operations and assets abroad, while many private citizens are also diverting funds and assets offshore.

Operational risks

Business and NGOs are also encountering operational obstacles. The capabilities of state and local authorities to provide services are limited or decreasing in several towns and cities. Operational problems related to electricity supply, water and waste management, roads and rail maintenance, postal services and other dimensions frequently emerge. Sometimes, there may be a location-specific or rural-urban dimension to uneven public services.

Simultaneously, German business tend to experience delays in answers from the bureaucracy and local authorities that may influence their operations, as well as problems in gaining work permits for talented foreign personnel. State institutions’ capability to perform developmental projects effectively will continue to be limited, creating some opportunities for foreign NGOs and partnerships. [22]

Security risks

In the Global Competitiveness Index, South Africa is 133rd out of 144 countries for the “business costs of crime and violence”. According to the latest figures released by the South African Police Service in October 2017, South Africans experience 19 000 murders per year and violent home robberies are at a ten-year-high. [23] European tourists are also affected by the high crime rates. [24]

Farmers play a vital role in ensuring food security for South Africa’s more than 56 million people. Members of the small farming community have dwindled from about 60 000 two decades ago to around 32 000. Farm murders have added to the incentive for many to leave the sector.

According to the Transvaal Agricultural Union (TAU), there have been 1 824 farm murders over the past 26 years. This year, so far, 74 farmers have been killed, with the historically violent months of November and December yet to come. The violence meted out is also often disproportionately brutal, with the victims being sadistically tortured. [25]

Privately-financed security services and community security projects, sometimes in conjunction with the local police, are likely to become increasingly important in rural districts, as well as in suburbs and towns. The geographical settlement patterns of the middle classes in South Africa are also likely to emphasize more geographical concentration, rather than dispersion. Business and NGOs are advised to align with such trends and initiatives.

Media watchdogs under pressure

Journalistic investigations of nepotism and corruption have often set the public agenda in 2017. Government ministers have been forced to account for their actions. However, there have also been attempts to intimidate and threaten critical journalists. Eventually, the protest by political proxies like Black First Land First (BLF) at the home of newspaper Business Day’s editor-at-large Peter Bruce in June 2017 turned violent. [26]

The South African National Editors Forum (SANEF) then obtained a court interdict against the organisation and its leader, Andile Mngxitama. SANEF’s Chairperson, Mahlatse Gallens, stated in her response to the court ruling: “They have specifically targeted journalists that have done in-depth reporting on allegations of corruption and state capture. We will not be deterred.”

German media have become more realistic about Zuma’s rule. [27] Where appropriate, business and NGOs may want to cultivate links with German media or their South African correspondents to reinforce free channels of information and monitoring of events.

Foreign NGOs are not operating in a totally benevolent environment. Two successive Ministers of State Security, David Mahlobo and Bongani Bongo, are well-versed in Russian security doctrines. They have stated that some foreign NGOs are viewed as agents of Western-supported subversion, “colour revolutions” as in the Ukraine, and regime change. NGOs that focus on human rights and are critical of government actions have complained about various forms of state surveillance, harassment and mysterious disruptive burglaries. [28]

A hybrid regime beyond 2019?

This overview proposes that current political dynamics can only understood if one realizes that under President Jacob Zuma, South Africa’s political order has transformed into a hybrid regime. There are still elections and accountable democratic institutions, but the locus of politics is now a field of power where these democratic institutions interact with increasingly powerful non-democratic actors, processes and rules of the game. [29]

The latter includes an executive presidency that has largely been able to avoid party, parliamentary and judicial accountability for scandals ranging from the arms deal and Nkandla, to the nuclear deal with Russia and the Gupta links. One-party-dominant politics and the securitization of politics are major factors.

De-Westernization in the public domain and a more narrow race-based nation-building are actively being promoted. Often this occurs without due attention to the constitutional rights of other citizens and communities that remain major contributors to tax payments, productive and job-generating enterprises, and zones of relative efficiency and stability.

The tone of politics has changed too. Intimidation and violence form part of the new incentive system, public discourse and ways of dealing with claims and counter-claims. These include threats of violence against whistleblowers like the Public Protector Thuli Madonsela and others, widespread violent protests, and the hundreds of political assassinations in past years, including twenty such killings during the local elections of 2016. [30]

The relationship between democratic and non-democratic elements can shift over time, but the hybrid regime is likely to be in place regardless of who succeeds Zuma. As the capabilities of the central government deteriorate or become limited, the political order will also continue to rest on new alliances, which include local strongmen and local deals. Business and NGOs would need to monitor such shifts in their areas of operation.

German policy in Africa

South Africa and Nigeria are Germany’s most important political and security partners in Sub-Saharan Africa. However, topics like human rights, South Africa leaving the International Criminal Court, and trade conditions are exposing differences between the governments. [31]

Under Zuma, Germany’s own role as an ally of South Africa has receded. As Professor Robert Kappel of the German Institute of Global and Area Studies (GIGA) indicates, “The Zuma government is pursuing an anti-Western course. It would rather orientate itself to China’s model of authoritarian capitalism”. [32] Cooperation between the Zuma government and Russia involves a major nuclear deal and other privileged trade and security ties. [33]

German policy on Africa has always included stemming flows of refugees and economic migrants by improving conditions in their home countries. However, the mass influx in 2015 elevated the reduction of migration to an even more urgent goal with domestic political implications in Germany. [34]

The Federal Ministry for Economic Cooperation and Development presented a new Africa concept in January 2017 to support this aim, focusing on inclusive and sustainable growth. Other ministries that will play an important role in German policy towards Africa, include the Federal Ministry of Foreign Affairs, the Federal Ministry of Economy and Energy and the Federal Ministry of Agriculture. [35]

Some pointers for business and NGOs

South Africa remains relevant for German policymakers and it still provides considerable opportunities for German business and NGOs. Nevertheless, its current political and economic circumstances give rise to challenges and serious risks. International actors in business, culture and education are therefore advised to consider the following steps in South Africa:

1. Review the possible forms, timing and extent of planned new investments and activities, as well as their opportunity cost, alternative opportunities and the possible benefits of contrarian thinking during turbulent times.

2. Rethink business models that will be resilient within the volatile political and economic environment.

3. Institute rigorous and robust measures of political, security and operational risk analysis and risk mitigation.

4. Give consideration to links or partnerships with self-help initiatives by community institutions and the private sector to ensure stable environments for foreign business and NGOs.

5. Take account of the diverse possible future trajectories of community institutions, cities and regions.

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References:

1. See Martin Pabst, Südafrika (C.H. Beck, München, 2008) and Johannes Dieterich, Südafrika: Ein Länderporträt (Ch. Links Verlag, Berlin, 2017) for good overviews.
2. https://www.mckinsey.com/global-themes/middle-east-and-africa/south-africas-bold-priorities-for-inclusive-growth.
3. http://www.fin24.com/Economy/sa-still-attracts-biggest-fdi-chunk-despite-uncertainty-20170503.
4. For an in-depth analysis, see Heinrich Matthee, Political turbulence and business risks in the ANC’s hybrid regime, December 2016 at https://sa-monitor.com/wp-content/uploads/2017/01/SAM-7-Year-End-2016.pdf.
5. http://www.bbc.com/news/world-africa-30923275.
6. https://www.economist.com/news/middle-east-and-africa/21717993-critics-say-will-let-them-abuse-their-people-jacob-zuma-wants-strengthen.
7. https://www.bloomberg.com/news/articles/2017-10-26/sap-finds-indications-of-misconduct-in-s-africa-on-gupta-links-j9887hnz.
8. https://www.ft.com/content/adfb1d2c-bf0f-11e7-b8a3-38a6e068f464.
9. http://www.bbc.com/news/business-41145883.
10. http://ewn.co.za/2017/09/08/sa-s-radical-economic-transformation-policy-could-turn-off-investors-moody-s.
11. http://www.fin24.com/Companies/Mining/gazette-read-the-full-mining-charter-20170615.
12. http://sa-monitor.com/wp-content/uploads/2017/01/SAM-7-Year-End-2016.pdf, Part IX.
13. https://www.bloomberg.com/news/articles/2017-03-20/south-africa-seeks-ban-on-foreigners-buying-agricultural-land;
http://www.nzz.ch/wirtschaft/drohende-enteignungen-in-suedafrika-1.18521632.
14. http://www.marktundmittelstand.de/zukunftsmaerkte/ppib-deutsche-firmen-fuerchten-um-standort-suedafrika-1233191/.
15. http://ewn.co.za/2017/10/10/imf-cuts-sa-growth-forecasts-as-politics-takes-it-toll.
16. https://www.iol.co.za/news/politics/sa-ranked-61st-in-wef-global-competitiveness-index-11374664.
17. https://www.fin24.com/Budget/mid-term-budget-lacks-the-lever-and-fulcrum-needed-to-move-sa-forward-20171029.
18. http://ewn.co.za/2017/06/10/moody-s-downgrades-sa-s-credit-rating.
19. https://www.businesslive.co.za/bd/economy/2017-10-30-moodys-downbeat-about-sas-credit-negative-medium-term-budget/.
20. https://www.fin24.com/Economy/business-not-hoarding-cash-to-cripple-the-economy-jabu-mabuza-20170628.
21. https://www.weforum.org/reports/the-global-competitiveness-report-2017-2018.
22. https://businesstech.co.za/news/finance/207631/this-is-who-is-paying-south-africas-tax/.
23. https://www.iol.co.za/news/politics/justice-safety/crimestats-political-interference-has-weakened-saps-11685050.
24. http://www.handelsblatt.com/politik/international/weltgeschichte-touristen-leben-in-suedafrika-gefaehrlich/20482192.html.
25. http://www.handelsblatt.com/politik/international/black-monday-gegen-mordserie-wenn-die-farm-zur-festung-wird/20524422.html. Also see Dirk Hermann and Chris van Zyl, Land of Sorrow: Twenty years of farm attacks in South Africa (Kraal, Centurion, 2011).
26. http://www.politicsweb.co.za/documents/this-is-our-target-list-of-white-journalists–blf.
27. “Die politische Krise in Südafrika: Land ohne Führung”, Der Tagesspiegel, 5 Juni 2015; http://www.tagesanzeiger.ch/ausland/naher-osten-und-afrika/ein-toxischer-praesident/story/22710192; http://www.fr-online.de/politik/jacob-zuma-suedafrika-versinkt-im-morast,1472596,34695278.html.
28. http://www.r2k.org.za/2016/11/18/mahlobo-must-go-get-the-securocrats-out-of-democratic-spaces/;
http://www. capetalk.co.za/articles/233352/minister-mahlobo-caught-out-lying;
http://www.dailymaverick.co.za/article/2016-0329-analysis-zumas-enemies-are-circling/#.WEQbuIWcHui;
https://martinplaut.wordpress.com/2016/03/22/south-africas-mysterious-burglaries/;
http://www.dailymaverick.co.za/article/2016-10-18-the-way-we-are-the-judge-the-opposition-leader-the-tax-settlement-and-the-mysteriousbreak-ins/#.WAb7m5Uw_IU.
29. https://sa-monitor.com/wp-content/uploads/2017/01/SAM-7-Year-End-2016.pdf.
30. http://raymondsuttner.com/2013/08/18/raymond-suttner-government-and-tripartite-alliance-no-pitch-at-marikanamemorial/; Gareth van Onselen, “Corpses pile up in ANC power struggle”, Business Day, 29 February 2016.
31. http://www.badische-zeitung.de/ausland-1/steinmeiers-vergebliche-visite-am-kap–95122906.html.
32. https://www.msn.com/en-za/news/indepth/germanys-brittle-but-critical-relationship-with-s-africa/ar-BBxAotv.
33. http://www.ascleiden.nl/news/new-asc-infosheet-pivoting-russia-china-and-anti-western-rhetoric-south-africas-foreign-policy.
34. https://makronom.de/der-migrationsdruck-aus-afrika-wird-weiter-steigen-22554.
35. For a critical analysis by Robert Kappel, see https://www.giga-hamburg.de/en/publication/new-horizons-for-germanys-africa-policy.

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* Dr Heinrich Matthee is a political analyst for companies in the Middle East and Africa, and a guest researcher at the Amsterdam Centre for Middle Eastern Studies, University of Amsterdam, Netherlands. He can be reached at heinrich.matthee@jisr.eu.

South Africa at a Glance
56 500 000 (mid 2017 estimate)
5.1% y/y in September 2017 (CPI) & +4.2% y/y in August 2017 (PPI)
2.5% q/q for the 2nd quarter of 2017
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