Outlook for 2014 in South Africa
16 December 2013
The influx of over 100 world leaders to the Nelson Mandela memorial service in Johannesburg illustrates how much foreign goodwill there is to South Africa. It is now up to South Africa to capitalise on this goodwill and to create an environment in which the country can prosper and foreign companies can feel comfortable in investing.
South Africa market activity
- Since the end of apartheid, market development in South Africa has fluctuated but seen an overall upward trend. GDP has increased by a factor of 2.5 and M&A deal value has more than doubled since 1994. South Africa now ranks as the 15th largest equity market globally with a market cap to GDP ratio of 2:1.
- The UK has been by far the largest investor in terms of M&A deal value over the period, followed by the US, but this trend is likely to change as investment from the Asia-Pacific region gains momentum.
- Mining and manufacturing have declined in terms of their combined contribution to the economy over 1994-2013, while the banking and real estate sectors have doubled in size.
Outlook - 2014 onwards
- Attracting FDI is absolutely crucial for South Africa to boost its economic growth in the medium to long term. Although South Africa has a huge advantage in its rich commodity base, major business partners like China will also be looking to the consumer, manufacturing and real estate sectors as the country’s middle class grows.
- South Africa is facing a number of pressures which include increasing fiscal deficits, prevailing labour and social unrest, growing political divisions, high rates of unemployment and inflation and a volatile rand.
- Despite this, South Africa has a strong and established economic infrastructure, stable legal and regulatory environment and sophisticated capital markets with its position as a gateway to the rapidly expanding economies of Sub-Saharan Africa.
- Economic growth is likely to remain sluggish in the short term but the long term outlook should be much more positive provided that South Africa can attract greater levels of FDI, increase productivity, ease labour tensions, stabilise its fiscal policy and avoid a ratings downgrade.
- Linklaters remains positive in its outlook on South Africa and established an alliance with the South African law firm Webber Wentzel in February 2013 as a joint commitment to South Africa and the African continent generally.
2014 and long term sector specific developments
- Mining, energy and utilities will continue to be a focus for investment in the short term, but the consumer, finance and banking, TMT, real estate and construction sectors should become increasingly important over the next decade.
- Inbound M&A activity should increase in the next few years, as South Africa’s relatively developed economy continues to attract cash-rich corporates from the Asia-Pacific region as a platform for investment in the African continent.
- Outbound M&A, particularly to other Sub-Saharan countries from South Africa, should continue to grow as developing African economies like Nigeria and Ghana gain momentum.
- Mining has been particularly affected by labour strikes and rising wage costs. Although progress has been made this will be a key focus for investors outside South Africa.
- Private equity is likely to be muted in the short term by comparison with M&A deal volume and value, but there is likely to be an increase in both domestic and international private equity activity over the long-term (particularly if investments in infrastructure and the consumer sector start to pay off).
- The majority of private equity activity is likely to continue to emanate from US and European firms, but African firms will gradually become more established. Some South African corporates and/or private equity firms may also look to investments in distressed assets in the Eurozone and the US.