Africa’s platform for growth

By Martin Kingston, chairman, Deutsche Bank South Africa

A glance at the South African economic landscape in 2006 will leave even the harshest of commentators struggling not to recognise the scale of opportunity that currently exists here.

It is a country that has perhaps the best operational and entrepreneurial business environment in Africa and is considered to have one of the most stable political environments on the continent. It has the most advanced financial system in sub-Saharan Africa and its mature legal and tax environments, as well as its advanced infrastructure network, gives it the edge over its African counterparts. The South African stock exchange (JSE) ranks among the world’s ten largest exchanges.

The South African economy expanded at a real annualized quarter-on-quarter rate of 4.8 per cent during 2005, with all sectors of the economy recording positive growth. Inflation has been stable, remaining within the South African Reserve Bank’s target range of 3-6 per cent, while during the year the fiscal deficit fell to 0.5 per cent of GDP, the second lowest level in the country’s history. Against this backdrop, in his latest budget speech Finance Minister Trevor Manual forecast GDP growth to average five per cent over the next three years. Some commentators believe that it could exceed six per cent.

While the high dollar-denominated international oil price poses a significant threat to the short-term inflation prospects, the medium to long-term investment outlook remains positive. Following this year’s Soccer World Cup in Germany, attention will shift to South Africa as it prepares to host the tournament in 2010. To this end, the Finance Minister has allocated R5bn to upgrade and develop infrastructure to ensure the event is a success.

In contrast, a number of structural constraints exist. Skills shortages, high levels of crime, expensive telecommunications, high unemployment, widespread poverty, large wealth gaps, capacity constraints at a local government level and HIV/AIDS remain key challenges for both investors and the government. The South African government has revealed its new growth strategy – Accelerated and Shared Growth Initiative (ASGISA). The economic strategy is aimed at lifting the country’s overall growth to six per cent over the medium term. Key growth areas have been identified; namely infrastructure, human-resource development, business-process outsourcing, tourism-sector bottlenecks and tackling the high cost of telecommunications. Government has committed itself to spend R372bn to unblock constraints it has identified. It plans to roll out a wireless broadband network through its parastatal, Sentech, which is expected to reduce the information and communication-technology costs. In addition, education remains the single largest area of spending in the budget, representing 20 per cent of spend in 2006/2007.

The South African president, Thabo Mbeki, has played an instrumental role in the formation of NEPAD (New Partnership for Africa’s Development) as well as his efforts to bring peaceful resolutions to conflict in Africa. NEPAD’s priorities are to establish conditions for sustainable development, secure policy reform and increased investment, while also mobilising resources by increasing domestic savings, and improving management of public revenue and expenditure.

The South African government’s official stance on the abolition of remaining exchange control is one of continued gradual easing. This was reflected in the latest budget, where the government increased the offshore foreign currency allowance for individuals, lifting it from R750,000 to R2m, and lowered the amount a South African company has to buy when investing in another company on the continent – from 50 per cent to 25 per cent. A gradual easing versus a seismic shift in exchange control policy continues to be a hotly-debated issue in corporate South Africa.

There has also been an increase in the interest of international firms in entering South Africa. Foreign investors currently account for 20-25 per cent of the JSE’s total turnover compared to 19 per cent some five years ago. The interest of international firms in entering South Africa has also resulted in the country being used as a gateway into the rest of sub-Saharan Africa. The South African government bond price has increased by 43 per cent to R141.15 over a six year period, with the yield tracking the price movement. The JSE all share index is currently 13.7 per cent of the FTSE all share index and 10.4 per cent of the Nasdaq composite compared to 7.5 per cent and 5.6 per cent respectively five years ago.

There is no doubt that recent inward investments have also had a significant impact on South Africa’s investment rating. The UK banking group Barclays bought a controlling stake in the country’s largest consumer bank, Absa, in a deal worth R33bn (US$5bn). The deal represented Barclays’ largest investment outside the UK and was noted as the largest foreign direct investment in South Africa to date. Vodafone, a UK-based telecommunications company, made an offer to increase its stake from 35 per cent to 50 per cent in Vodacom, South Africa’s leading mobile phone operator in a deal worth R21bn (US$2.4bn); and the R5.4bn (US$0.9bn) buyout of leading industrial services business, Waco International, by CCMP Capital Asia, resulted in the largest private-equity deal in South African history. These deals highlight significant flows of capital into South Africa and are certainly a sign of confidence in the economy. A developing theme has also been an interest among top-tier African entities to do a secondary listing on the JSE, which, thanks to the high ranking of the JSE amongst capital-market exchanges, gives them exposure to foreign investors. A good example is Oando Plc, an integrated energy company with operations geographically spread across West Africa with its primary listing in Nigeria. In November 2005, Deutsche Bank successfully advised Oando on a secondary listing on the JSE.

In parallel, we have seen a number of credit rating upgrades by Standard & Poor’s, increasing the country’s attractiveness as an investment destination. Based on Standard & Poor’s ratings, South Africa is currently rated BBB+. This rating has increased from BBB in May 2003, and BBB- in February 2000. Sovereign ratings are critical to successful capital raising by corporations. Sixteen countries in sub-Saharan Africa now have sovereign ratings from Fitch, Moody’s and Standard & Poor’s compared to five countries that previously received the ratings.

Public-private partnerships (PPPs) have also been successful in South Africa. Their success has been due to the ability of the public sector to identify appropriate projects and develop a regulatory framework that has given lenders the confidence and assurance of revenue flows from subsequent projects. PPPs continue to grow in markets like Mauritius and Botswana as South African financiers seek opportunities in other African countries; PPPs contribute to many of NEPAD’s priority objectives – especially infrastructure, human and capacity development, as well as resource mobilisation. The private sector can play a significant role in capital raising as they can mobilise resources to increase domestic savings and investment and attract capital flows through the capital markets.

Just as we have witnessed an increase in the number of corporations investing in South Africa, so too have we seen some signature South African companies grow into major global players.

SABMiller, the world’s second largest brewer by volume, is a South African born company listed on the JSE and LSE in 1999. In 2005, it made significant acquisitions to establish itself as one of the largest brewers in the world. The market capitalization of the group as at 23 February 2006 was £18bn.

The international financial-services group, Old Mutual Plc, is also a company that started as a South African mutual society with a demutualization coupled with a primary listing in the UK in 1999. In September 2005, the group made an offer to takeover Skandia – a large Swedish insurer in a R38bn (US$6bn) deal. On 2 February, Old Mutual confirmed that it had successfully increased its interest in Skandia to 89.54 per cent. The market capitalization of the group as at 23 February was £10bn, making it the eighth largest insurer in Europe.

Anglo American, one of the world’s largest mining groups, shifted its headquarters and primary listing from Johannesburg to London in 1998. The group owns 74.8 per cent of Anglo Platinum, the world’s leading primary producer of PGMs. Other assets of the group include 79 per cent of Highveld Steel & Vanadium, the largest vanadium producer in the world; 100 per cent of Mondi, the paper and packaging division; and 65 per cent of Kumba resources, which manages a portfolio of world-class assets in iron ore, heavy and industrial minerals, base metals and coal. The group has gold interests represented by its 51 per cent interest in AngloGold Ashanti, one of the world’s leading gold producers as well as a 45 per cent stake in the diamond company, De Beers. Geographically diverse with operations in Africa, South and North America as well as Australia, Anglo American’s market capitalization was £30bn as at 13 February.

And finally, any assessment of the current economic landscape must look at the progress being made with Black Economic Empowerment (BEE), an integral part of South Africa’s transformation process. Aimed at redressing the economic imbalance caused by apartheid, it is at the moral heart of the country’s development and is an imperative for doing business. The formulation of policy and legislation to achieve BEE has been driven by a number of sectors and government departments alongside the Department of Trade and Industry. The government’s broad-based BEE Act (2003) provides a legislative framework for the promotion of BEE and aims to increase broad-based and effective participation of previously disadvantaged individuals in the economy. It aims to encourage the redistribution of wealth and opportunities to previously disadvantaged communities and individuals, including black people, black women and people living with disabilities. It also aims to achieve a substantial and equitable transfer of ownership, management and control of South Africa’s economic resources to the historically disadvantaged majority on a sustainable basis.

To this end, the market has seen, and will continue to see, significant growth in deals aimed at fully empowering corporate South Africa. Multinational entities have entered into BEE deals, whereby a percentage stake in the South African operations has been transferred to previously disadvantaged individuals. For example, Siemens sold a 26 per cent stake to two black consortiums – Sekunjalo and Africom. Deutsche Bank was the first foreign bank to sell a stake to empowerment groups, with 15 per cent being sold to Uthajiri financial-services group and ten per cent being allocated to previously disadvantaged employees. De Beers announced its intention to sell 26 per cent of its assets to Ponahalo, a BEE partner, in a deal estimated to be worth R3.8bn.

Deutsche Bank has been at the forefront of advising in the country’s flagship BEE transactions. The bank advised Old Mutual Plc in selling 13.8 per cent of its South African operations to a BEE consortium in a deal valued at R3.4bn and Sanlam on its six per cent equity sale in a transaction valued at R1.3bn. Deutsche Bank also advised Impala Platinum in selling 27.1 per cent of its equity valued at R5.3bn to the Royal Bafokeng and advised Anglo American in the Kumba Resources BEE transaction valued at R16bn, the biggest empowerment deal in the country’s history.

This is clear evidence that the pursuit of true transformation is not an inhibitor to doing business in South Africa, but a stimulant for corporate activity and economic growth for the region. A thriving and vibrant economy, South Africa’s economic growth represents tremendous opportunity for entrepreneurs and established businesses alike, both domestic and foreign. And it is that growth that is a central catalyst to bringing about sustainable solutions to the considerable socio-economic challenges facing the country and the region.