Investing in South Africa

The main risk factors

Political risk
No matter what people say, the primary issue is always political risk and it can present both opportunities as well as challenges for investors. In particular, political stability is a key factor in ensuring a conducive business environment.

All investors should closely monitor political developments including changes in government policies and regulatory and legal changes. Social unrest became a high-risk factor after the riots in KwaZulu Natal and South Africa is by no means the only country to have social unrest issues. To manage political risk, it is recommended to engage with local stakeholders, industry associations, and government bodies to provide up-to-date insights and help assist mitigate political risks.

Economic risk
The South African economy virtually ground to a halt during Covid and unfortunately, the economy faces various risks including slow economic growth, very high unemployment rates possibly the highest in the world, and inflation rates (although there are indications that this may be stabilising).
Investors have to evaluate the economic climate and assess the factors such as GDP growth, fiscal policies, interest rates and inflation rates. Many investors use diversification strategies across sectors to mitigate economic risks

Grey listing
South Africa’s grey listing by the Financial Action Task Force (FATF) will result in increased scrutiny, due diligence, stringent regulations, and increased compliance and associated costs. Investor confidence has been affected, which could result in a decrease in foreign direct investments and cash flows. It is imperative that money laundering concerns are effectively addressed at all levels.

Power outage risk
The risk of power outages and potentially even grid collapse is a significant concern for South African businesses and all investors. These outages have varying impacts on different sectors of the economy.
Whether an investor is looking at investing in a retail business, a manufacturing business, or even a financial services business, it is essential to make provision for the energy crisis and consider its impact on the bottom line.

Crime
SA’s crime rates have been well-publicised internationally and pose a significant challenge to South Africans and foreign investors. Corruption in particular is currently one of the biggest bugbears of all investors and that is why many now have specific policies identifying issues such as corruption, collusion, anti-bribery, and conflicts of interest.
It is thus essential to assess the security situation in the specific sector and place of business and implement robust security measures in order to protect assets, employees, and operations. Presently South African business is trying to work together with the government to tackle the barrage of crime. It is recommended that investors engage security experts to provide guidance on risk mitigation strategies and consider insurance options and costs.

Foreign exchange risk
The foreign exchange rates are highly fluctuating and presently there is a downward trend in ZAR against all major currencies. Weak exchange rates favour exporting businesses.

Most international businesses develop strategies to manage currency risks including hedging strategies, diversifying revenue streams, and managing balanced currency exposures.

Market risk
The general trend in Africa was to see growth in the middle class and in buying power however, this is no longer as certain. Investors have to do market research to identify specific target segments, preferences, and potential barriers to entry. Competitive Pricing in particular is essential in South Africa along with effective supply chain and logistics.

Taxation risk
Corporate and personal tax rates are high which constitute a significant tax risk. It’s important to consider withholding taxes on dividends, interest and royalties but fortunately SA has a large double taxation network. Exchange control is also a noteworthy challenge for foreign investors.