The Current Macro Environment Of South Africa Economics Essay

Politically, the ANC has created 16 years of continuous rule and government stability but uncertainties surround their ability to manage union strikes and a steadily decreasing electorate vote.

Economically, GDP is expected to show continuous growth despite a sharp drop in 2009. Business environment remains strong through FDIs although warning signs herald a weakening of the currency in the future.

Socially, although economically viable to invest in this country when considering the low costs of entry, South Africa’s working population presents a lack of skilled labour required by our firm.

Technologically, concentrated areas of R&D, industry specific knowledge and improving transport infrastructure help to compensate the temporary shortcomings in energy supply.

The legal system is generally supportive towards companies with strong regulation and employment laws.

Environmentally, SA is an international leader in tackling global warming. It has great potential for producing renewable energy but environmental hazards and heavy reliance on coal for energy should be taken into concern.

An extensive PESTLE framework will be used to highlight the major contributing factors that would affect such a strategic move.

Political

Government Stability

The present government, the African National Congress (ANC), has shown relative stability, winning four consecutive elections since the fall of the apartheid in 1994. This has allowed continuous implementation of policies through sixteen years in power, the focus of which has been on improving social integration and employment generation.

Source: Datamonitor, Aug 2009

Struggles under Political Unrest

Despite strong governance indicators, SA still has much to develop as a democracy. The government is kept under pressure from the rising power of trade unions and an inability to control violent demonstrations. The ANC has also suffered a decreasing share of the electorate vote since first coming into power, receiving 65.9% in the recent 2009 election. Although a near two-thirds majority, commentators argue this is below the important threshold of 66% that allows the party to unilaterally alter the constitution.

Implication: Pressure from trade unions may cause wariness in future business investment and a loss in consumer confidence.

Economical

Corporate Tax Rate

There is a basic corporate tax rate of 30.2% of profit for all companies1 as of 2010.

Interest Rates

The South African Reserve Bank is independent and operates in much the same way as Western central banks, influencing interest rates and controlling liquidity through its interest rates on funds provided to private sector banks.2

Exchange Rates and Trading

Unlike other African countries, SA prides itself as an open economy, benefiting from trade liberalization with many blocs3 . However, it has been posting a negative balance of payments since 2002. As of 2008, SA’s total exports amounted to $96.1 billion, which was considerably higher than the total export value recorded at $83.0 billion in 2007. This has been exacerbated by the surge in inflation since monetary policies implemented in 2000. Recently, inflation has slowed to 6.89% year-on-year in June 2009 from 8.0% y/y in May 2009.4

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Implication: An open economy will facilitate the expansion immensely, meaning less red-tape and cost savings. A negative trade balance can be advantageous as it will weaken the exchange rate, lowering costs for our firm. The lowered inflation will also help stabilise the economy.

Foreign Direct Investments

FDIs are highly valued in SA and the government has further encouraged them through the US – ACU Trade, Investment and Development Cooperative Agreement signed in July 2008. This places special attention on customs cooperation, technical barriers to trade and investment promotion.5

Implication: Increases in FDIs will greatly aid entry into the country as these policies will help facilitate external investments such as ours.

GDP Trends

The GDP growth rate has been less than ideal with a sharp fall in 2009. However it is projected to bounce by 2011 with constant increase in GDP since. The economy is dominated by the services sector, which contributes 65.3% of its total GDP in 2008. 6

Implication: The increase in GDP shows that SA’s economy is continually developing and could be a beneficial environment for setting up a company.

Socio-cultural

Unemployment

The apartheid regime has resulted in social aspects wrought with conflicts. Despite high literacy rates and policies to improve this by the ANC, unemployment remains surprisingly high at 24.9%1.

Implication: This highlights an underlying problem, which is the severe lack of skilled labor that does much in hindering business growth.

High Crime Rate

SA also presents a relatively high crime rate. A survey compiled by the UN Office on Drugs and Crime2 ranked South Africa second for assault and murder per capita, and first for rapes per capita.

Implication: This results in a potential threat to the safety of both our physical and human capital.

Effects of HIV

There is also a growing impact of HIV on the supply of skills and productivity. The graph below shows the sources of indirect cost on a firm due to HIV.3

Lack of Skilled Labour

More commonly, educated workers are deciding to move abroad, contributing to the rising brain drain and lack of skilled labour. Although there is a net emigration of -0.13 migrant(s)/1,000 population (2009 est.)4 This is due to the an increasing flow of unskilled labour from neighbouring countries in search of better economic opportunities and does not contribute to the necessary labour force required for the growth of the nation.

Implication: This lack of skilled labour will require huge cost on the company in training workers.

Technological

Infrastructure

SA has some of the best transport infrastructure in the world, placed in the top 20 countries for number of airports, length of rail and length of roads1. In the past four years $6.95bn was invested into improving infrastructure.

In the next three years capital investment is planned to be $7.52bn to increase capacity for the 2010 World Cup.2 56% of funding in 2009 was used to expand current operations and the remainder was used to upgrade existing infrastructure.

Figure 1: Transport Infrastructure Investment (2009)3

Figure 2: Planned Transport Infrastructure Investment (2010)4

Implication: Improving transportation provides potential employees locally, nationally or internationally with reliable and convenient means of transport to the company’s location.

Energy

The energy situation has much to improve with state-owned firm, Eskom, struggling to meet the demand caused by the “post-apartheid economic boom”5. The industrial sector uses 68% of the supply but it is estimated that savings of up to 60% can be made with low-cost investment6. Alternative means of energy are currently being looked into and Nuclear Power plants have been proposed and could be in place by 2020 if approved.7

Implication: Electricity supply is currently inconsistent but demand side management and planned expansion in the future should solve any problems.

Communications

Current services are not up to UK standards but broadband is becoming widespread with wireless available in some locations. Fibre-optic cables were laid under the Atlantic Ocean in 2009 by Seacom with the intention of providing high capacity bandwidth “linking communities in Southern and East Africa, Europe, and South Asia.”7

Implication: International communications are well catered for and services in cities are comparable with UK standards.

Research and Development

R&D with respect to science and technology has been a growing area since 2002 with the ‘Innovation Hub’ created in Pretoria. It claims to be “the leading knowledge-intensive business cluster in South Africa”8 creating a community focusing on innovation and knowledge creation.

Implication: Locating in an area within the Innovation Hub could provide us with a pool of potential employees with the correct skills, education and backgrounds.

Legal

Labour Laws

SA has strong labour laws especially after the creation of the Labour Relations Act 1995, created to allow consultation between employees and employers to remove discrimination and ensure a diverse labour force.

Employment regulations include:

Compulsory by law to abide by Minimum Wage guidelines set out by government. These levels vary from sector to sector.

The South African Labour Legislation encourages the freedom of collective bargaining.

Implication: Structured legal system in place which contains laws to aid our entry into the country. Labour laws are similar to those in which we already operate so only small adjustments are needed to current practices.

Intellectual Property Rights

SA is currently not a member of the Madrid Union so filing for international trademarks is more complex than most countries. However, they intend to join within the next year. Copyright can only be registered for films, but arises automatically by law under the Berne Convention and applies to all countries that are signatories of it.1

Patents cost between $915 and $1300 initially, with an annual renewal fee of around $130 beginning in year three.2 Patent Co-operation Treaties (PCTs) are available which provides 30 months of international protection in 135 countries.

Implication: PCTs allow any costs of patents to be deferred until the domestic countries in which to obtain the patent can be more carefully selected. This additional time also increases the chances of a successful patent application.

Starting a Business

The process for business setup is as follows:

Source: DoingBusiness.org, 2009

Environmental

Leader in Climate Change

Environmental developments and climate change are issues close to SA. Having hosted the World Summit on Sustainable Development in 20021, the country also follows the Kyoto Protocol and featured prominently at the Copenhagen Conference in 2009. Incumbent President Jacob Zuma has pushed for plans to continue with CO2 reduction of 42% by 2025.2

Implication: Good international relationships with countries such as USA and UK, as well as a reputation in protecting global environments.

The Department of Environmental Affairs has also implemented policies to subsidise firms who use renewable energy resources. With the local demand for environmental protection and reassurance of safety from environmental hazards, there are huge incentives for firm to improve energy usage’s efficiency1.

Energy Reserves

South Africa heavily relies on coal production for energy, coal providing 88% of total primary energy and 90 % of electricity generation. However, the nation has notable renewable energy potentials3.

The country has an overflowing wind resource and the highest levels of solar radiation in the world. The expansion of renewable energy in South Africa is maintained and upheld by the White Paper on Renewable Energy (Nov 2003), which aims to generate 10,000 GWH of renewable energy for final energy consumption by 2013.

Implication: The government has actively supported energy production development although some environmental hazards may be detrimental to a suitable working environment.

Conclusion

Through use of the PESTLE framework, we can conclude that the macro climate of South Africa is generally positive with much potential for expansion. The main areas of weakness found will undoubtedly require further investigations by management. However, breaking into the country’s technology sector can be a success given that the company is fully aware of the obstacles involved.