Thomas White Global Investing
South Africa
South Africa Stamp
June 15, 2012
A Postcard from the Middle-East & Africa
South Africa: Opportunities in the Rest of Africa Beckon

South Africa Durban Port

Durban, in South Africa, is one of the largest seaports in Africa. The transport corridors to be developed as part of the Tripartite Free Trade Agreement among 26 African nations will link inland industrial and trading centers across the region to major ports such as Durban.

The signs are evident all across Africa, from Kenya in the east to Ghana in the west. South African businesses are increasingly looking at opportunities in their own backyard on the African continent with newfound enthusiasm.

Though South Africa still lags the U.S. and China in total investments in the rest of Africa, in recent years, the growth in investments by the country’s companies has been the highest. In 2011 alone, South African companies announced or launched 59 new projects in other African countries, according to a report from Ernst & Young.

The new ‘Refocus on Africa’ strategy of South African companies covers a broad range of sectors, from banking to renewable energy. The four largest South African banks are now scaling back their operations outside the continent to strengthen their traditional presence in other African countries. The African businesses of these banks have grown steadily in recent years and are profitable enough that some of them are opening regional hubs in places like Nairobi, Kenya, to take advantage of the opportunities. To complement their strength in business banking, the South African banks are also scaling up their retail banking operations in most markets through new banking licenses and acquisitions. In the financial services sector, one of South Africa’s biggest insurance companies, which currently has operations in six other countries in the region, is now planning to enter Ghana and Tanzania. The largest South African telecommunication services company is already the dominant player in several markets across the continent.

Not content with the 123 supermarkets spread across 15 countries outside South Africa, the country’s largest retail group is planning to expand even more aggressively in large markets such as Nigeria. Other large retailers, including Wal-Mart, which acquired one of the big South African retailers last year to be its spearhead in the region, are not behind in this quest for regional expansion. South Africa’s largest automobile retailer and logistics services provider, which has acquired more than 10 businesses in the last two years, is pursuing further acquisitions in neighboring countries. The second largest coal miner in the country has recently formed a joint venture with a leading Indian power utility to explore renewable energy projects in South Africa and other countries in the region.

The eagerness to expand overseas is partly driven by slower domestic economic growth, as weak global demand, widespread labor strikes, and currency gains have buffeted South Africa’s mining sector. Unemployment has surged this year, constraining income levels and domestic demand growth. In contrast, some of the smaller economies in the region are growing at a relatively faster pace. Though most of these economies are significantly smaller than South Africa’s, they form a sizeable market when taken together. Better familiarity with the environment is another factor encouraging South African companies to focus more on their home continent than elsewhere. What is more, going by the World Bank’s Doing Business Report, several African countries are more business friendly than the famed BRIC group.

At the same time, there is an even bigger rationale for South African businesses to establish themselves in markets closer to home before their global competitors do so. Some of the smaller African countries now boast the fastest GDP growth rates in the world and are expected to maintain their ranks for the next several years. Among the 10 economies that are forecast to achieve the best growth rates between 2011 and 2015 by the IMF, seven are from Africa.

While these countries remain underdeveloped, their fast paced economies will likely lift a fairly significant percentage of the population to the middle class in the coming years. Average poverty levels in African countries are forecasted to decline from 60% in 1995 to 38% in 2015, according to World Bank data. The African Development Bank recently estimated that nearly a third of the continent’s population can now be considered part of the middle class, though the income level used to make this assessment was fairly low by global standards. This ongoing structural economic shift in Africa will likely continue to open up large opportunities for businesses, as the continent’s aggregate GDP is forecasted to exceed $2.5 trillion by 2016.

Governments in Africa are also waking up to the huge potential to expand intra-regional trade and investments. Free Trade Agreements have been concluded among members of three regional groups that include most countries in the eastern and southern parts of Africa. The three groups are currently in negotiations to form a free trade area, covering all the 26 member countries, by 2016. Transport corridors connecting major industrial and trade centers in the region are a major part of the negotiations.

With a combined population of nearly 600 million and relatively high long-term sustainable growth rates, this free trade region in Africa could potentially emerge as one of the most dynamic economic zones in the world. When that happens, the bold steps that South African businesses are currently taking will likely pay off handsomely.

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