Magazine article Risk Management

International Profile: South Africa

Magazine article Risk Management

International Profile: South Africa

Article excerpt

From 2005-2007, the South African economy held up well with growth at 5% due to the tightening of monetary policy, investments and dynamic household consumption. This growth rate is expected to drop below 3% in 2009, however, as South Africa contends with an energy crisis attributed to a shortage of production capacity in relation to growing demand.

This critical energy situation, which could drag on for the next five years, has already prompted a reassessment of energy-intensive investment projects crucial to expanding South Africa's capacity for economic growth. Continuing inflationary tensions (which reached 10.2% in June 2008) could further undermine consumer purchasing power, especially with South African Reserve Bank's tightening monetary policy proving ineffective in combating inflationary pressures with external causes.

In this context, the country's external financial position remains shaky. A current account deficit that exceeded 7% in 2007 will likely remain large this year despite the growth slowdown. Additionally, exchange rate risk has increased as the rand depreciated 20% against the dollar between December 2007 and March 2008. The exchange rate variations observed since April 2008 attest to the greater volatility of the South African currency.

Market Overview

South Africa's trade liberalization began in 1990 and gathered speed after the country's WTO accession in 1994. Since then, customs duties have been slashed, something that has been facilitated by the Trade, Development and Cooperation Agreement signed between the European Union and South Africa in 1999. Looking forward, the full impact of the agreement will not be felt until 2012, when 86% of products imported from the European Union will become exempt from customs duty.


South Africa is not a signatory to the WTO government procurement agreement, however, and tenders have traditionally been regulated at the central level by the State Tender Board. At local level, oversight comes from one of nine provincial tender boards, but a common service provider will soon replace the tender boards with the aim of facilitating the adoption of a uniform policy on government procurement in line with the State Tender Board Act.

Social Realities

The social context in South Africa is tense amid an insufficient distribution of wealth. The xenophobic violence that broke out last June in the Johannesburg and Cape townships and caused nearly 100 deaths while displacing tens of thousands of people was also a reflection of deep currents of frustration. The naming of Jacob Zuma, backed by the Communist Party and the unions to lead the ANC, South Africa's main political party, increases the uncertainty over the country's future economic and social policies.

In the private sector, the Preferential Procurement Policy Framework Act, which has been in force since February 2000, creates a point system that favors companies whose shareholders or managers are "historically underprivileged people" (black, mixed race, Indian, women and the disabled). Public procurement in South Africa serves to widen Black Economic Empowerment (BEE) by encouraging South African and foreign companies to team up with black partners. Where a public tender exceeds $10 million, foreign companies are required to pay 30% compensation (offset) on the total value of imports under the National Industrial Participation Program.

BEE is driven by a limited number of laws, codes of best practice and sector charters. A Black Economic Empowerment Charter has been adopted by the financial services industry, which imposes a number of obligations, including 25% black equity ownership by 2010. In December 2004 and December 2005, the South African government sent two sets of best practice codes relative to BEE for review for the purposes of standardizing socioeconomic transformation initiatives across all sectors of the economy. …

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