South Africa: A Rainbow in the Rain

The impact of the coronavirus pandemic on investing continues to reverberate across the globe. Last year the macro economy contracted by 4.3% and international foreign direct investment (FDI) levels came to an abrupt halt. Fortunately, despite heightened investor caution, the FDI slump is unlikely to become a lasting feature of the global economy. 

However, uncertainty is still at an all-time high, and investors continue to delay or cancel projects as countries face the prospect of re-closing borders. Furthermore, threats of new virus variants have further dampened hopes that vaccines will lead to a long-term solution or a permanent return to normality any time soon. 

Africa recorded a FDI total of $38 billion in 2020, representing a drop of 18% from $46 billion in 2019, according to the United Nations Trade Association. Nevertheless, thanks to the continent’s innovative spirit, the COVID-19 crisis has also prompted positive change and development across Africa. An increased allocation of capital from corporates to their corporate VC activities, acquisitions of African tech companies, intensified FDIs and major initiatives such as the ‘Enrich in Africa’ programme, shine the spotlight on what the region has to offer. South Africa in particular, is renowned for its strategic location, varied topography and great natural beauty, and is on the cusp of transformative and long-lasting growth. 

Geographically situated to service international markets, South Africa boasts excellent infrastructure, sound public finances, a developed financial market, valuable innovative capacity, a highly skilled workforce and a steadily growing consumer market. Nicknamed the Rainbow Nation, reflecting the country’s multicultural diversity, South Africa has experienced rapid change and regeneration in the last few years, and is ranked as an ‘upper middle-income country’ by the World Bank. Of the approximate 400 companies on the continent earning more than $1bn, about half are based in South Africa. More specifically, Durban paves the way over other South African locations, offering a southern gateway to and from Africa, an attractive social environment and a rising economic development rate.

The main obstacle that South Africa faces in becoming a leading investment destination, is the backlog of infrastructure development and the slow turnaround in administrative procedures and approval times. Consequently, South African cities are making huge efforts to improve, develop and stimulate enterprise, and have implemented reforms, making it easier to do business.

FDI in South Africa fell by almost half last year, in line with the world-wide downturn, according to the United Nations Conference on Trade and Development. The country attracted R2.5 billion in new investments in 2020, a 45% decline from the 2019 amount of R4.6 billion. Fortunately, with many of the COVID-19 restrictions being lifted, FDI is making a comeback. With a good business climate, a strong focus on production and financial services and a tourism and retail sector showing great potential, South Africa is attractive to investors.

The country remains a prolific host country, gaining two large investments last year – an undersea fibre optics cable by Google that is set to boost the country’s internet speed and the announcement that US multinational PepsiCo was acquiring Pioneer Foods. There was also a major investment in telecommunications, namely the Teraco Data Environments’ R4.4-billion JB4 data centre. The facility is being built in Ekurhuleni, Gauteng, and will become the largest single-site data centre in Africa.

South Africa experienced a sharp decline in FDI in 2019, with FDI inflows falling by 15.1% to US$4.6 billion. This fall is in stark contrast to the FDI inflow increase of 446% in 2018, which was largely driven by President Cyril Ramaphosa’s push to attract US$100 billion in new investments, intended to energise the country’s lagging economy. Fortunately, the crisis is accelerating trends such as digitization, market consolidation and regional cooperation, creating important opportunities including boosting local manufacturing which has experienced a significant focus on new investments, reinforcing the role of business and developing urban infrastructure. 

FDI is key for South Africa’s recovery. There are huge opportunities in the employment-intensive, export-oriented or green sectors. Additionally, new waves of tech expertise are rising beyond the usual powerhouses, and Africa is one of the fastest-urbanizing regions in the world. It is also one of the most entrepreneurial areas on the planet. Reports from the African Development Bank showed that 22% of Africa’s working-age population are starting businesses – the highest rate of entrepreneurship in the world. Home to Naspers, one of the world’s largest investors in tech companies, South Africa recorded the second-highest number of start-ups behind Nigeria. 

The COVID-19 crisis could just be the stimulus required to accelerate the digital transformation in sectors such as financial services, retail, education and government. The region saw promising developments before the pandemic, and will continue to improve the domestic investment climate, adapting policies and strengthening regional collaboration through the African Free Continental Trade Agreement.

Up to 1 billion people could live in Africa’s urban areas by 2050. The winning combination of human resource, connectivity and the significant growth potential will secure positive long-term returns for investors. If you want to increase your market share, lower your costs and gain an edge on competitors, look to South Africa. The country is looking over the rainbow – opening up, aiming high and thinking big.