Country outlook South Africa - CaixaBank Research

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Country outlook South Africa - CaixaBank Research
Country outlook
South Africa
Country outlook South Africa - CaixaBank Research
Closing date of this issue: March 2020

                                                                                            Form of Government: Parliamentary Republic

   South Africa                                                                             Capital: Pretoria, Cape Town, Bloemfontein

                                                                                            Official language: English, Afrikaans and nine languages from
                                                                                            the Bantu family (primarily Zulu and Xhosa)

                                                                                            Population: 59 million inhabitants (2019)

                                                                                            Currency: Rand (ZAR)

                                                                                            Exchange rate: 1 EUR = 17.28 ZAR (29/02/2020)
                                                                                                            1 USD = 15.73 ZAR (29/02/2020)

                                                                                            GDP: $358 billion (0.6% of world GDP)

                                                                                            GDP per capita: $6,100 ($13,754 purchasing power parity)

                                                                                            Ease of doing business: 84th in the world out of 190
                                                                                            according to the World Bank (Doing Business)

                                                                                            Religion: Catholic: 88%

Country Outlook is a publication that is produced jointly by CaixaBank Research and BPI Research (UEEF) and it contains information and opinions from sources that we consider to be reliable. This
document is for information purposes only, so CaixaBank and BPI are not liable in any way for any use that may be made of it. The opinions and estimates are provided by CaixaBank Research and BPI and
may be changed without prior notice.
South Africa
                                                                                                                                    PIB. Variación interanual (%)

Economic       GDP. Year-on-year change (%)                                                                   CPI. Year-on-year change (%)
forecast       3.0
                                                                                         Forecast
                                                                                                               7
                                                                                                                                                                      Forecast

               2.5
                                                                                                               6
               2.0
               1.5                                                                                             5
                                                                                                                                                                    5.2      5.0
                                                                                                1.0
               1.0                                                                 0.8
                                                                         0.2                                   4
               0.5                                                                                                                                        4.1

               0.0                                                                                             3
                      Average 2015       2016       2017   2018         2019       2020       2021                 Average 2015    2016   2017   2018   2019      2020     2021
                      2010-14                                                                                      2010-14
                                                                                                                3,0

                • The economy has performed poorly in the last                                               •2,5
                                                                                                                Inflation in 2019 reached its lowest level since
                   years, reflecting governance problems and                                                     2005 and stood 7within the South African
                                                                                                               2,0
                   structural rigidities (weak institutional                                                     Reserve Bank’s 6 range (3%-6%). This
                                                                                                               1,5
                   framework, policy uncertainty and power                                                       performance was due to weak economic
                                                                                                               1,0
                   cuts), contributing to the deterioration of                                                   activity, which offset
                                                                                                               0,5                   5    the impact from the
                   business confidence and weak private                                                          increase in energy prices. For 2020-21, we are
                                                                                                               0,0
                   investment. For 2020-21, we are expecting a                                                                       4
                                                                                                                 expecting an increase     in inflation to levels
                   slight recovery, but with significant risks:                                                  around 5%, in line with the recovery of the
                                                                                                                                     3
                   public sector problems, slower implementation                                                 economy and looser financial conditions. In
                   of reforms, the deterioration of business                                                     addition, the enlarged bill of imported food
                   sentiment, the evolution of commodity prices,                                                 (due to the depreciation of the Rand) and
                   trade tensions, the impacts of coronavirus and                                                fuel, electricity and water prices will probably
                   of downgrading to a non-investment grade                                                      put upwards pressure on the evolution of
                   rating by Moody’s.                                                                            domestic prices.

Economic             Benchmark interest rate (%)
policy               and exchange rate (ZAR/USD)                                                               Fiscal balance (% GDP)
                                                                                     Forecast                                                                   Forecast
                 8                                                                                     16      0
                                                                                    15.1     15.2
                                                                           14.4
                                                                                                       14      -2
                 6
                                                                          6.6      6.2        6.1
                                                                                                       12
                 4                                                                                             -4
                                          EE. UU.                       Eurozona                            Emergentes
                                                                                                       10
                 2Fuente: CaixaBank Research, a partir de datos deCitigroup y Bloomberg. 8                     -6
                                                                                                                                                        -6.1
                                                                                                                                                                   -6.7     -6.8
                                                                                                       6       -8
                 0
                      Average   Average 2015    2016   2017      2018    2019      2020     2021                    Average 2015   2016   2017   2018   2019     2020      2021
                      2010-14   2010-14                                                                             2010-14
                        Benchmark interest rate (left scale)
                        Exchange rate (right scale)
                Note: FYI the Central Bank just cut the depo rate.

                 Current account (% GDP)                                                                      Public debt (% GDP)
                                                                                  Forecast                                                                                         0
                                                                                                                                                                Forecast
                 0                                                                                            80                                                           69.6
                                                                                                                                                                   65.3            -2
           8 -1                                                                                                                                         60.8
                                                                                                              60
                -2                                                                                  16                                                                             -4
           6
                                                                          -3.0                                40
                -3                                                                                  14                                                                             -6
           4                                                                         -3.7       -3.7
                -4                                                                                  12        20
                                                                                                                                                                                   -8
           2
                -5                                                                                  10         0
                      Average 2015       2016       2017       2018      2019      2020        2021                 Average 2015   2016   2017   2018   2019     2020      2021
           0          2010-14                                                                          8            2010-14
                                                                                                       6
               • On monetary policy, after the increase in the                                               • The government’s objective to boost growth
                  repo rate to 6.75% in November 2018 to control                                                while adjusting its fiscal position will prove
                  the evolution of prices, the South African                                                    increasingly difficult, given the context of
                  Reserve Bank (SARB) decreased the reference                                                   subdued economic growth and slow reform
                  rate by 25 basis points in mid-2019, to 6.5%, and                                             implementation.
                                                                                                                            0        Moreover,80 financial problems
                  again to 6.25% at the beginning of 2020. SARB                                                 in SOEs, especially
                                                                                                                           -1          the public utility company
                  should continue lowering the repo rate in 2020-                                               Eskom, are -2   expected to60 continue to drain
                  21, given that inflation expectations remain                                                  public funds
                                                                                                                           -3    and further  40
                                                                                                                                                 contribute to the
                  relatively contained and the economic recovery                                                fiscal slippage.
                                                                                                                           -4      As a result, without corrective
                  is fragile. It is unlikely that, after the Moody’s                                            measures,-5 the country will  20  continue to face
                  downgrading, the SARB would react by                                                          increasing-6 fiscal deficits and public debt ratios.
                  tightening the repo rate, but if the pressure on                                              The context will be even0 more difficult after
                  the Rand is intense then a “wait and see” phase                                               Moody’s has downgrade the rating to non-
                  (maybe accompanied with selective intervention)                                               investment grade.
                  is probable.
South Africa

Financial       Private credit (% GDP)                                                Gross external debt (% GDP)
conditions                                                          Forecast                                                           Forecast
                74                                                                    70

                72                                                                    60                                                          63.1
                                                                                                                                          60.6
                                                           71.3                       50                                        56.4
                70
                                                                                      40
                                                                        69.8
                68                                                                    30
                                                                               68.3
                                                                                      20
                66
                                                                                      10
                64                                                                     0
                     Average 2015     2016   2017   2018   2019         2020   2021        Average 2015   2016   2017   2018   2019      2020     2021
                     2010-14                                                               2010-14

               • The country displays a healthy financial and •    The current account deficit is expected to
                  banking sector, despite the decrease in bank       widen over 2020-2021, in part due to the
                  revenues. The system is facing some difficulties74
                                                                     economy’s low external
                                                                                      70        competitiveness. This
                  in increasing its profitability, and asset quality
                                                                  72 will create a challenging
                                                                                      60            environment for
                  worsened due to the constraints in the          70 South Africa, given
                                                                                      50    its high dependence on
                  construction sector. However, the bank’s                            40 finance the external deficit.
                                                                     capital inflows to
                                                                  68
                  exposure to Eskom and the government is            Additionally, a 30
                                                                                      significant share of external
                                                                                      20
                  limited.                                        66 debt is denominated in domestic currency,
                                                                                      10
                                                                  64 which makes the 0country more vulnerable to a
                                                                     currency shock, an event that is non-negligible
                                                                     if we take into account the very likely rating
                                                                     downgrading by Moody´s.

Political      •
                The ruling African National Congress (ANC) • However, the relatively comfortable majority
situation       won the 2019 elections and President Cyril     gives President Ramaphosa the legitimacy to
                Ramaphosa was subsequently reappointed.        advance the implementation of his reform
                Nevertheless, the ANC won the election with a  agenda, focused on raising potential growth
                smaller majority of 57.5% of the vote, down    (through reforms aimed at lifting productivity,
                from the 62.5% obtained in the 2014 election.  improving competitiveness, and attracting
                This was also ANC’s worst result since the end investment), tackling the rising government
                of apartheid in 1994. Several corruption       debt, and rebuilding South Africa’s institutions.
                scandals, high levels of unemployment and      Nevertheless, it is far from certain whether he
                persistent racial inequality in the access to  will manage to implement this policy agenda
                land and housing are behind the erosion of its in full, given that opposing factions within the
                electorate support. 			                        ANC will continue to act as a brake. In this
                                                               context, losing the investment grade rating
                                                               after the downgrading by Moody’s should be
                                                               an incentive for a stronger reform impulse.

Long-term       GDP growth (%)                                                        Population (milions of inhabitants)
outlook         4                                                                     66
                                                                                                                                  64.8
                                                                                      64
                3
                                                                                      62
                                                                  1.7
                2                                                                     60
                                1.5
                                                                                                      57.9
                                                                                      58
                1
                                                                                      56

                0                                                                     54
                         Average 2009 -18              Average 2019 -29                               2018                        2028

                The South African economy is expected to • The main problems faced by the country include:
               •
                grow near to but below 2% per year in the       a very high incidence of AIDS; widespread
                long run. The country’s ability to tackle major poverty; an undeveloped educational system; an
                socioeconomic challenges in the upcoming        inefficient labour market (unemployment
                years will be the main determinant of its long- ≈30%); leveraged state-owned enterprises;
                term growth. However, it is likely that such    weakened institutions and high levels of
                fundamental shifts cannot be accomplished       corruption.
                without affecting some political elites.
South Africa

Country                                                      Last                                            CDS* 5 years (basis points)
                                             Rating                           Outlook
risk                                                       changed
                                                                                                             195
                                                                                                                           192.5
                                                                                                             190
                                               BB          23/03/18           Negative
                                                                                                             185
                                                                                                                                               178.0
                                               Ba1         27/03/20           Negative                       180

                                                                                                             175

                                                                                                             170
                                               BB+         07/04/17           Negative
                                                                                                                    Average 2016-19        29/02/2020

                                Indicates that the country has an “investment grade”. 		                   *Credit default swap: measurement of country risk that reflects
                                                                                                             the cost of ensuring the non-payment of the sovereign bond.
                                Indicates that the country does not have an “investment grade”.

Risks                          SHORT-TERM                                                                                  LONG-TERM

                               • Public finance imbalances		  -                                                    +      • Dependence on mining
                                                                                                                              industry                                        -              +
                               • Impact of coronavirus
                                  on the world economy		       -                                                    +      • High inequality                                 -              +
                               • Greater impact of rating                                                                 • Inefficient labour market                       -              +
                                 downgrading		-                                                                     +      • Corruption and weak
                                                                                                                              institutional framework                         -              +
                               • Policy uncertainty and slow
                                 implementation of reforms     -                                                    +
                               • Financial problems in SOEs		 -                                                    +
                               • Weak business confidence		   -                                                    +

Business                       STRENGTHS                                                                                  WEAKNESSES
environment                    • Healthy and developed financial                                                         • High inequality and poverty.
                                  and banking sector.		                                                                   • Shortage of infrastructures.
                               • Market size.                                                                            • Inefficient labour market.
                               • Use of technological innovation.		                                                      • Weak educational system.
                                  			                                                                                     • Corruption and weak institutions.
                                                                                                                          • Power outages.

Main sectors                   • Mining industry, financial sector, tourism, transport and logistics.

CIBI | CaixaBank                POSITION                           PILLARS                                                                                SUBPILLARS
Index for Business              IN COUNTRY
Internationalisation                                                                               1. Accessibility
                                RANKING                                                              100
                                                                                                                                                          Top
                                                                                                                                                          Easiness of operating
                                                                                                     80

                                 44                            5. Stability
                                                                                                     60
                                                                                                  42.4
                                                                                                     40
                                                                                                                              2. Ease of
                                                                                                                                                          a business
                                      67                                                             20
                                                                                                                   55.2       operating                   Infrastructures
                                                                                     43.9
                                                                                                      0                                                   Similar tastes to Spain

                                                                                         53.3               51.2
                                                                                                                                                          Bottom
                                                                                                                                                          Purchasing Power
                                                     4. Financial environment                                         3. Commercial
                                                               and innovation                                         attractiveness
                                                                                                                                                          Macroeconomic stability
                                                                                                                                                          Distance, communications,
                                                                                  — Africa — South Africa                                                 and agreements with Spain
                                                                                       (Min. 0 - Max. 100)
                                                                                                     100

                                                                                                     80

                                                                                                     60

                                                                                                     40

                                                                                                     20

Source: CaixaBank Research, based on data from Bloomberg, IMF, OECD, Oxford Economics and Thomson Reuters Datastream.
South Africa

Taxation         There are two types of tax on the earnings         progressive tax in line with their profits.
                 obtained by the different companies                Earnings below ZAR 70,700 do not have to
                 operating in South Africa, depending on            pay any tax; companies with earnings
                 their size. The general rate for large             between ZAR 70,701 and ZAR 365,000 are
                 companies is set at 28%. In the case of trust      levied at 7%; earnings from ZAR 365,001 to
                 companies the rate rises to 40%, although          550,000 ZAR at 21%; and all companies
                 special trusts are charged tax at a rate of        exceeding ZAR 550,001 pay the general rate
                 between 18% and 40%. There is also a tax           of 28%. For micro-enterprises (turnover
                 on long-term insurance company funds that          below one million ZAR), there is a sliding tax
                 varies from 28% to 30%. Companies                  scale different from the one for small firms:
                 distributing profits after tax as dividends are    up to ZAR 150,000, 0%; from ZAR 150,001 to
                 subject to a withholding tax of 15% on the         ZAR 300,000, 1%; from ZAR 300,001 to ZAR
                 dividend paid out. Smaller companies (small        500,000, 2%; up to ZAR 750,000, 4%, and
                 business corporations, SBC) whose turnover         earnings above ZAR 750,001, 6%.
                 is less than ZAR 14 million are subject to a

Investment       In South Africa, foreign direct investment for     sectors that continue to absorb funds from
                 2019 was 1.137 billion dollars. This inflow of     other countries are: financial services, mining,
                 investment is expected to continue falling. The    manufacturing, logistics and trade.

Establishment    LOCAL COMPANY
                 The main forms of companies that exist in          companies (Pty. Ltd.), the number of
                 South Africa are: public companies (Ltd.) or       shareholders must be between one and 50.
                 private companies (Pty. Ltd.), commercial          Neither of these two forms of company require
                 partnerships, sole owner, trust companies and      a minimum capital in order to be established.
                 branches of foreign firms. The procedures to       Collaborations or partnershipsse can be
                 set up a company are relatively simple. So-        formed between non-resident shareholders or
                 called public companies (Ltd.) are similar to      with South African resident shareholders, but
                 limited liability companies and must have a        there must be at least two and a maximum of
                 minimum of seven shareholders, with no             20; these shareholders are fully liable for the
                 maximum limit. In the case of private              company’s debts.

                 BRANCH
                 To set up a branch of a foreign firm, it must be   Commission of South Africa within the first 20
                 registered as an external company with the         days after starting commercial activity.
                 Companies      and    Intellectual    Properties

Alliances        FREE TRADE ZONE
strategic        In South Africa there are “industrial              the competitiveness of South African products.
                 development zones”, with a total of five           These five zones are: East London, Coega,
                 throughout the country. These are located close    Richards Bay, Mafikeng and OR Tambo airport.
                 to airports or ports and are aimed at boosting

                 JOINT VENTURE
                 There are two ways of setting up a joint           be set up via a partnership agreement specifying
                 venture in South Africa according to South         all the basic aspects of the association. The
                 African law: non-equity joint ventures and         latter case is more like a joint company and is an
                 equity joint ventures. The former is more like a   independent commercial enterprise. It must be
                 collaboration between two or more firms and        registered in the country in accordance with
                 the resulting company does not have its own        current legislation and comes under the
                 legal personality. This kind of association must   Company Act as if it were a local firm.

Customs         FREE TRADE AGREEMENTS
conditions      The main treaties signed by South Africa and        Other agreements:
                the rest of the world are as follows:               • With the United States: Trade and Investment
                • With the EU: Trade, Development and                 Framework Agreement (TIFA) and Trade,
                   Cooperation Agreement (TDCA).                       Investment and Development Cooperation
                • With Switzerland, Norway, Liechtenstein and         Agreement (TIDCA).
                   Iceland: EFTA-SACU FTA.                          Negotiations are currently under way with
                Preferential trade agreements:                      India for a Preferential Trade Agreement and a
                • With Argentina, Brazil, Paraguay, Uruguay        tripartite Free Trade Treaty: SADC-EAC-
                   and Zimbabwe.                                    COMESA.
South Africa

Customs          INDUSTRIAL DEVELOPMENT ZONE
conditions       The benefits of these zones centre on: Customs       exported; easy access to administrative
(continuation)   security (Customs Controlled Area), making           information to carry out investment projects;
                 customs services and procedures much easier,         better quality infrastructures than in other
                 being able to import without VAT machinery           zones of the country, and access to the South
                 and commodities if these are to be used to           African government’s incentive scheme.
                 manufacture products that are going to be

                 GENERALISED SYSTEM OF PREFERENCES (GSP)
                 South Africa no longer forms part, as a beneficiary, of the European Union’s GSP, as of 1 January
                 2014 when the new system was approved, which will last until 2024.

Negotiations     BUSINESS CULTURE
and protocol     South Africa is a country affected by its history.   advisable to use a local agent-distributor, and
                 International isolation as rejection to apartheid    once initial contact has been established, you
                 has produced businesspeople who are reluctant        must be constant. Negotiations are usually
                 to do business with foreign firms, so their          carried out in a cordial atmosphere and pressure
                 character and culture must therefore be taken        should be avoided.
                 into account. To begin commercial relations, it is

Top fairs        • IFEA.                                             • Africa’s Big Seven.
                 • Decorex Urban.                                     • Africa Investment Forum
                 • Africa Energy.

Websites         • Chamber of Commerce: www.sacci.org.za
of interest      • Investment Incentives in South Africa: www.investmentincentives.co.za
                 • Southern African Customs Union: www.sacu.int
                 • Industrial Development Corporation: www.idc.co.za
                 • Information for trade and investment: www.tradeinvestsa.co.za

Payment          MEANS OF COLLECTION
and charging     It is advisable to always ensure payments are        often used as the bank can help to manage all
methods          received by using the usual international            the commercial documentation procedures; at
                 methods, primarily documentary credit, which         sight (CAD – Cash against Documents) or term
                 offers more guarantees. This must be carried         (DA – Delivery against Acceptance). Further on,
                 out in the initial phases of international           when there is more trust, international transfers
                 commercial relations to effectively ensure           can be used via SWIFT. The managing and
                 payment collection options on the part of the        factoring of invoices is also commonly done by
                 company. Documentary remittances are also            international financial institutions.

                 MEANS OF PAYMENT
                 Documentary credit is the most secure means of payment for both parties. It is customary in almost
                 all international trade transactions.
                 EXCHANGE RATE INSURANCE
                 International transactions are affected by           currency whose risk can be hedged through an
                 market fluctuations, and it is therefore advisable   exchange insurance and which is listed in
                 to hedge this kind of transaction against            international exchange markets.
                 exchange rate risk. The South Africa Rand is a

CaixaBank        At the South African office, in addition to          and transactions, as well as accompanying
in the country   facilitating close collaboration with local          companies that wish to establish themselves in
                 financial institutions, the main objective of the    the country with investments and deployment
                 representative office is to support CaixaBank        projects.
                 customers in the country, both in foreign trade
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South Africa representative office
13 Fredman Drive
Fredman Towers, 9th floor, Sandton 2146
Johannesburg
South Africa
Director: Jose María Segurola
Tel: +27 (0) 724172909
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