Election 2014 puts South African investment on hold

Political uncertainty and crime weigh heavy on business leaders

Deepak Nagar, chairperson of Grant Thornton South Africa
Deepak Nagar.jpg

Uncertainty surrounding next year’s election in South Africa is impacting heavily on business confidence. It has seen two-thirds of the country’s business leaders putting investment decisions on hold, nearly 50% are considering taking future investments abroad and 27% are considering selling their businesses.That is the core message from the Focus: South Africa section of the Grant Thornton International Business Report (IBR). “There is no doubt that businesses are waiting for next year’s elections to bring stability and clarity on the future direction of our country,” Grant Thornton South Africa national chairperson Deepak Nagarsaid in a statement after the release of the report.

From the overview of the economy at the start of the section on South Africa it is also clear that the wave of strikes that rocked the key mining sector at the end of 2012, “further dampened growth in an economy already suffering from the global slowdown. Following the widespread unrest, the mining sector contracted by 12.7% in Q3 of 2012, although construction (3.3%) and manufacturing (1.2%) did expand.

The economic slowdown is still extremely burdensome on the South African economy and additional local pressures are not helping at all. The embattled Brazil, Russia, India, China and South Africa (Brics) region continues to directly impact on local business expansion, while service delivery concerns and political uncertainty persistently lash organisational growth,” said Nagar.

On the positive side South Africa moved up from number 41 to 39 in the 2013 World Bank’s 'Ease of Doing Business' rankings and inflows of Foreign Direct Investment into the country rose from US$1.2bn (R11.7 billion ) in 2010 to US$5.8bn (R56.5 billion) in 2011.

However the report also revealed that 57% of business executives were negatively impacted by poor government service delivery, with 81% of respondents indicating poor delivery around utilities, such as water and electricity supply. Of the 150 businesses surveyed 36% of respondents indicated that they were being negatively affected by a combination of red tape, transport inefficiencies, labour strikes, unreliable payments by government and tender fraud.

Of the senior executives polled, 19% stated that they were considering emigrating, with 84% of this group citing the high crime rate as the driver of this decision. The crime rate also continued to negatively impact investor sentiment in the second quarter of 2012, with 61% of business executives, their staff or family of staff, having been directly affected by a contact crime incident in the past 12 months. 

Crime also has a marked cost implication for businesses and 72% of business leaders surveyed, who identified crime as a concern in the last year, had experienced increased security costs. “It’s hard to understand how security costs for businesses never seem to stabilise. Investing in securing your premises and protecting your staff is a massive cost outlay for South African companies,” Nagar said. 

Of the senior executives polled, 19% stated that they were considering emigrating, with 84% of this group citing the high crime rate as the driver of this decision. Despite shorter-term investment uncertainty, owing to political unease, the IBR reported that local business owners had retained a “euphoric” future outlook and continued to express positivity about the next 12 months with 45% of executives stating that they were optimistic about business prospects over the next 12 months.

This came as data on optimism levels revealed a dramatic reversal of fortune for business leaders in two of the world’s largest economies – the United States  and the United Kingdom . Business optimism in the US climbed  from 31% in the first quarter  to 55% in the second quarter, the highest level since 2005, and in the UK from -1% in the first quarter to 34%. 

However, Grant Thornton noted that, while US business confidence had improved, optimism among peers in China had dropped to 4% from 25% in the first quarter, the  lowest level since 2006. The Brics region economies also saw a dramatic decline in business optimism, recording 23% in the second quarter, from 48% in the first three months. In Europe the picture is very similar while the global economic outlook remains highly uncertain. The eurozone sovereign debt crisis is perhaps the key challenge, and not just for business leaders in Europe.

Prospects from two of South Africa’s most important trading partners, the European Union and China, in the near future are also not positive. The EU is China’s largest trading partner, and China is the EU’s second largest partner after the US. China remains the world’s largest exporter, but the slowdown in Europe has weighed on economic growth.

Growth rates in and around Europe look set to disappoint over the next 12 months. Having contracted by 0.4% in 2012, the eurozone is expected to expand by just 0.2% in 2013, the report states. The emerging economies of central and eastern Europe are expected to grow faster in 2013 (2.6%) but their rates of expansion remain depressed by a slowdown in foreign direct investment (FDI) inflows.

Since its launch in 1992 in Europe, the IBR is now a quarterly survey of more than 3 000 senior executives in businesses across the world. It surveys more than 12 500 business leaders in 44 economies on an annual basis. In South Africa, 150 businesses were surveyed across all industry sectors, ranging from medium to large in size, with a total employment ranging between 100 and 399. Data for the latest report were drawn from interviews conducted between November and December 2012. 

Piet Coetzer

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