An economic powerhouse

By Giles White, partner, and Robert Cleaver, managing associate, Linklaters.

South Africa has undergone extraordinarily dramatic changes following its transition to democracy. Despite some of the inevitable growing pains this entails, the country has significantly exceeded the expectations of most observers. Economic growth has been, and continues to be, strong. It is, more than ever, the economic powerhouse of Africa and opportunities abound in every sphere of economic activity.

The end of apartheid has seen the end of the economic isolation that had limited business opportunities and restricted economic growth for a generation. In addition, the new government has adopted a prudent but forward-looking fiscal and economic policy. As at the end of Q3 2005, the economy had experienced 24 uninterrupted quarters of economic expansion. GDP grew by 4.5 per cent in 2004 and is set to grow at about the same rate in 2005. Inflation (which had historically been high) has moderated and interest rates have fallen to historic lows. The Johannesburg Stock Exchange has performed strongly for several years and property prices have risen sharply.

Traditionally, the focus of the economy was mining with South Africa being the world’s largest producer of platinum, gold and chromium. The economy has evolved considerably and is now well represented in other sectors such as financial services, automobile assembly, metalworking, iron and steel, chemicals, fertilisers and foodstuffs.

Apart from growth-oriented policies, there has been an effort to redistribute wealth, moving away from an historic pattern of white ownership to one that is more representative of the population as a whole. This has taken a number of forms, ranging from a land redistribution programme (focused on the restitution of land to black South Africans) to Black Economic Empowerment (BEE) initiatives.

The M&A market has expanded significantly since 1994. This has been boosted by a number of factors. First, the end of economic isolation and the lifting of many foreign exchange restrictions have enabled South African companies to restructure and to acquire assets abroad, moving away from the complex web of domestic cross-holdings that had characterised the previous era. Second, economic growth has given many companies the resources to undertake substantial transactions. And third (and most recently), the South African M&A market has been boosted by the government’s BEE initiatives: Black economic empowerment deals are now widespread across a range of business sectors, often with some very innovative financing structures.

In the past 18 months, the country has seen some significant M&A transactions. These include Harmony’s unsolicited bid for Gold Fields, the unbundling of the majority of Kumba’s iron-ore operations and the acquisition of a majority stake by a BEE company in the remaining assets of Kumba and the sale of a 26 per cent stake in De Beers to Ponahalo, a BEE company. In addition, foreign investment is increasing. Last year Barclays Bank (which had “disinvested” from South Africa in the 1980s) acquired a majority stake in Absa, one of South Africa’s main banks and Vodafone increased its effective shareholding in Vodacom (one of South Africa’s main mobile phone operators) from 35 per cent to 50 per cent.

Looking forward, the natural resources sector will continue to attract inward and outward investment, especially as the sector continues to consolidate and some of South Africa’s older mines become more marginal. The financial-services sector is likely to be of further interest to foreign banks that will look to use South Africa as a gateway for the rest of Africa, and the same could be true of the telecoms sector. Project finance and infrastructure work will continue to be important as the government’s major infrastructure-investment plans are implemented and preparations are made for the 2010 World Cup and there will be clear opportunities for lenders and advisers in this area.

A number of reforms to the legal system have had a positive impact too. Apart from the abolition of discriminatory legislation and the introduction of a Bill of Rights, there have been other reforms that have brought South Africa’s commercial law more in line with international norms, including a substantial overhaul of its competition laws.

South Africa still faces many challenges, particularly in addressing the social and political problems bequeathed by apartheid. But the progress that has been made in the last ten years and the positive economic outlook mean that opportunities abound and that the infrastructure and skills that are needed to exploit these opportunities are readily available.