South Africa faces big challenges but there are many positive developments

10th September 2018

South Africa faces big challenges but there are many positive developments

Merger & Acquisition (M&A) transactions in South Africa declined in terms of both the volume and value of domestic and cross-border deals in the first half of 2018, according to analysis by Baker McKenzie of Thomson Reuters' M&A data for South Africa. Transactions fell by 44% and 52% in terms of volume and value, respectively, in the first half of 2018 compared to H1 2017. In H1 2017, there were 243 total deals worth USD 6,6 billion in South Africa, this decreased to 135 deals worth USD 3,2 billion in H1 2018.

There are a number of elements causing the market contraction in South Africa. Firstly, this decrease in investment activity shows that we should not underestimate the impact of corruption and suboptimal governance in South Africa on the mood of investors. Issues around state capture and bribery and corruption have made international investors cautious and it has proved all too easy for business to get caught up in these issues. There are various examples of multinationals in South Africa and further afield in Africa who have become embroiled in corrupted environments and there are serious consequences attached to this.

In the United States and the United Kingdom, for example, the anti-bribery and corruption laws carry with them significant penalties for non-compliance. Investor reluctance is not just about government corruption, however. The Steinhoff narrative has put South Africa in the spotlight and raised concerns about governance in the private sector as well. As such, all investors doing business in Africa should consider conducting practical, risk-based compliance assessments of all their operations, including investigating all reports of illegal or improper activities and promptly remediating all issues that are identified.

Further, economic concerns, negative GDP growth, the devaluing rand, high unemployment, the threat of another credit rating downgrade, issues around service delivery, as well as the fact that South Africa is close to its next election means that investors are also holding back, adopting a "wait and see" approach. There are also two major political issues causing uncertainty and affecting investment confidence and appetite: land reform and national health insurance.

With regards to land reform, President Cyril Ramaphosa was quoted in a news article in August 2018 explaining some of the reasoning behind expropriation without compensation that were raised during public hearings on the land reform matter, “…there have been several suggestions on when expropriation without compensation may be justified. These include, for instance, unused land, derelict buildings, purely speculative land holdings, or circumstances where occupiers have strong historical rights and title holders do not occupy or use their land, such as labour tenancy, informal settlements and abandoned inner-city buildings.....This is no land grab. Nor is it an assault on the private ownership of property.” Ramaphosa appears to be assuring investors that the land reform process will follow the rule of law.

While there was a lot positive sentiment around the appointment of Ramaphosa as South Africa’s new president, reality has now set in and investors are realising that Ramaphosa has to deliver on a very tall order after years of maladministration. However, most analysts feel he has already begun to turn things around and is heading in the right direction, although it will take time to correct the issues.

There are many other positive developments in South Africa that bode well for its future and that look set to help the country overcome its current challenges. Here are some examples:

South Africa is currently facing numerous challenges relating to economic and political uncertainty and there is no easy fix. However for those with an appetite for risk and a willingness to be part of the solution there are still many excellent opportunities for investors the country.

Written By Morne van Merwe, Managing Partner, Baker McKenzie Johannesburg