High levels of growth, exceptional confidence, a rapidly expanding middle class and economic stability are ambitions beyond the realms of possibility for most countries emerging from a post-conflict situation. But South Africa is demonstrating that the unthinkable is possible. In spite of negative publicity about its level of violent crime, its slow response to the HIV/AIDs pandemic and its ambivalent attitude to Zimbabwe, the country’s economists are reporting “amazing” levels of business and investment confidence.

While there are concerns about South Africa’s handling of some social issues and its relationships with other African nations, business confidence remains strong. Consumer confidence – driven both by the emergence of a black middle class and the promotion of black economic empowerment – is helping to drive demand for products and services.

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Efforts to stamp out corruption in the country have been encouraging, with anti-corruption organisation Transparency International ranking South Africa 51st out of 163 (ahead of Greece and Romania) in its Corruption Perceptions Index 2006.

In 2006, GDP on a purchasing power parity basis was estimated at $576.4bn. By sector, agriculture represented 2.6% of GDP, industry 30.3% and the lion’s share was provided by services at 67.1%.

Developed services

In the services sector, the financial services industry is a major contributor to the South African economy. According to emerging market consultancy Oxford Business Group’s (OBG) Emerging South Africa 2006 report, services accounted for 22.5% of the value of all listed transactions on the Johannesburg Securities Exchange on December 30, 2005. The good credit environment and low borrowing costs have improved asset quality and raised the demand for credit. These factors – along with compliance with international best practice – have all contributed to the country being able to offer a banking system designed for the developed world.

Another service industry performing well is the call-centre/business process outsourcing sector, with investment taking place in parts of the Western Cape and Gauteng. Luke Mills, executive director at Calling the Cape, a regional agency that promotes the industry, told fDi: “There are now 2500 offshore seats here in Cape Town, and the numbers are swelling, with Budget Insurance now operating a call-centre facility with 700 seats.”

Although it continues to face stiff competition from other offshore locations, such as India and the Philippines, Mr Mills says: “Increased demand for call-centre services in South Africa has seen 40% growth in the past 12 months – and 36% growth is expected for the next 12 months.”

Flocks of tourists

Another service segment that is enjoying growth is tourism. Travellers continue to flock to the country, attracted by its wildlife, beaches, cosmopolitan city life and wines. Although it has traditionally been considered a low-cost destination, the country is increasingly focusing on the higher end of the market. And, as South Africa gets ready to host the FIFA Football World Cup in 2010, this is a sector that is expected to grow considerably. OBG says: “Tourism is South Africa’s fourth largest earner of foreign exchange, and has the potential to generate some R40bn ($6.66bn) annually, while creating two million jobs.”

Although the country is attracting foreign investors, Dennis Dykes, chief economist at South African bank Nedbank, says: “Most of the FDI has been in existing operations rather than greenfield activities.”

He adds: “There has been a lot of interest in investment in the existing operations of traditional areas like motor vehicles. And there has been a lot of interest on the private equity side in the retail sector, where cash flows are very strong; the model there is to buy companies with strong cash flows so you can use the cash flow to pay off the debt that you raised to buy the equity and at the same time make efficiency improvements.”

Business confidence

According to the business confidence index published by Rand Merchant Bank and the Bureau for Economic Research at the University of Stellanbosch, business confidence has been rising rapidly since 2001, increasing from 10 points to 80 points. Manufacturing sector confidence has also increased at a similar rate.

Rudolf Gouws, chief economist at Rand Merchant Bank, told fDi: “The improvement in business confidence and the fact that it’s held at such an extraordinary level for an unprecedented amount of time is incredible. And that confidence is now being experienced across the board. For a long time, manufacturing lagged behind because of earlier strength of the currency. But it seems as if, from 2002 onwards, the South African manufacturing industry came to grips with the fact that it must become more lean and mean. Last year, when the rand had weakened somewhat, it was already in a much better position to capitalise on this, so even manufacturers’ confidence is almost up there with retailers, wholesalers, the construction industry and so on.”

Good forecasts

Growth has been solid in recent years and forecasts are positive. Christo Luüs, chief economist at South African bank ABSA, says: “Growth is still expected to average just below 5% this year. However, the balance of payments has deteriorated on two counts: the current account registered a R111bn deficit (6.4% of GDP) in 2006, while net FDI flows were negative to the tune of R47.4bn in 2006, following the R34bn net inflow of 2005.

“Capacity constraints, in terms of products, infrastructure bottlenecks and skills, are mostly responsible for the pressure on the current account with higher import volumes, while such shortages also had some dampening effect on business confidence,” he says.

“With the high commodity prices, the resources sector remains quite buoyant, but construction, retail sales, banking, communications, transport and most other services sectors have all benefitted from the consumption boom. Manufacturing capacity utilisation rates are at absolute highs.

“Private sector investment has picked up sharply, while government investment has also started to rise, with much more expected to come considering the government’s commitment to expanding and refurbishing South Africa’s ailing infrastructure to the tune of some R410bn over the next few years,” says Mr Luüs.

The growth question

Some pundits question how long this growth can continue. However, Martin Jankelowitz, head of market and economic research at South African investment firm Investment Solutions, argues: “We are now running a budget surplus and expect to have another one this financial year, which is remarkable. Real interest rates are high relative to the rest of the world, and that gives me confidence about the longevity.

“A prime area of concern is the high current account deficit, which means many think the currency could be vulnerable. However, I would say that although it’s high, I don’t think the currency is vulnerable. I think it’s very steadily valued at these levels because corporate South Africa is still competitive at these levels. Manufacturing numbers are strong. In fact, the biggest constraint in South Africa is that we are splitting at the seams. There is insufficient capacity to deliver, so we are limiting our own growth,” he says.

To support this growth the country needs sufficient energy-generating capacity to meet the increasing demand for power. Heavy investment in building generating capacity is now taking place. “In the Western Cape alone, two new power stations have been commissioned in the past 12 months,” says Mr Mills. “And energy firm Escom has committed to a $15bn investment to upgrade its facilities.”

Playing host

South Africa has long been a big hitter when it comes to sport. Since the end of sanctions the country has played host to the Rugby World Cup and the Cricket World Cup, and is now preparing to host football’s FIFA World Cup in three years’ time.

“We’re preparing for 2010 in a conservative manner,” says Mr Jankelowitz. “We’re doing the right things. The number of new stadiums being built is being limited, and enhancements to stadiums are being limited to only those that can be sustainable business models post-2010,” he says.

Mr Luüs says: “Of the R410bn South Africa is investing in public sector infrastructure over the next three years, R14.9bn has been set aside for the soccer event and several billion for big projects like the Gautrain and King Shaka Airport, which will aid in transporting local and international fans and tourists. Nonetheless, the amount of public funds set aside for World Cup-related infrastructure is relatively small compared with the R400bn total that was already allocated before South Africa was awarded the event.”

There’s everything to play for in the new South Africa, and optimism, enthusiasm and competition are essential characteristics in any winning team. The country seems to have these in abundance and is using them to build itself a strong future post-2010.