Country Risk analysis of South Africa

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GLOBAL BUSINESS ENVIRONMENT
ASSIGNMENT
COUNTRY RISK ANALYSIS OF
SOUTH AFRICA
SUBMITTED BY
GROUP 7
SECTION – A
PGDM
AN OVERVIEW OF THE SOUTH AFRICAN ECONOMY

Here are some of the strengths and weaknesses of the South African economy.
Strengths
1. Cost of living
2. Secondary school enrollment
3. Cost of office rent
4. Export concentration
5. Effective personal income tax
6. Stock market capitalization
Weaknesses
1. Unemployment rate
2. Relocation threats of production

3. Labor relations
4. Life expectancy at birth
5. Health problems
6. Youth unemployment
7. Employment (%)
8. Relocation threats of R&D facilities
9. Relocation threats of services
Health:
It’s been more than 20 years since the peaceful transition from apartheid to a
constitutional democracy was done in South Africa, yet health and well-being of most
citizens has not been at the forefront of the government. The South Africans have been
plagued by infectious and non-communicable diseases, persisting social disparities,
and inadequate human resources for providing proper healthcare to its growing
population.

Some of the major challenges faced by the government in terms of healthcare are:
 Health and poverty: The main problem that South Africa’s population has been
facing in terms of health care has been that the growing population does nothave
access to basic requirements of life such as clean water, nutrition, effective
sanitation, poor housing conditions, access to vaccination, malnutrition and so
on. In the past 20 years South Africa has made significant progress in terms of
economic growth butstill 45% ofthe population earn minimal income. This adds
to major chunk of the population which does not have access to proper
healthcare.
 HIV/AIDS Pandemic and Local Responses:South Africa amounts to 17% of
the world’s population which is affected by HIV infection, which is a huge
amount. The devastating effect of the virus has huge impact on the whole
population and would require special attention. The government was in denial
for a long time and their responsewith regard to funding was severely criticized
by the global community. Owing to global pressure the government came up
with a policy to provide antiretroviral therapy (ART) to all HIV Patients. The
US Presidents Emergency plan for AIDS Relief was a policy set up by the US
government to curb the rising HIV problem has saved millions ofSouth Africans
lives is now being reconsidered and this will have a potentially dangerous effect
on the lives of the population.
 Tuberculosis: South Africa has one worst tuberculosis epidemics in the world.
Despite notable progress in improving treatments South Africa still amounts to
1.8% of all new cases of tuberculosis in the world. The government has tried
making major progressive steps but still the retreatment cases are up and the
people are severely affected.
 Widening Disparities in Health Care: The national public health sector,
staffed by some 30% of the doctors in the country, remains the sole provider of
health care for over 40 million of people of the country who are uninsured and
contribute to 84% of the national population. Only 16% of the population which
amounts to 9 million have access to private health insurance. About 25% of the
uninsured people pay out of their pockets for private-sector care. Most of the
state hospitals are in a crisis due run down of infrastructure, underfunding, and
mismanagement.
The state of healthcare in South Africa is a mess and the government need to
come up with schemes to help counter these issues. The state of public health

infrastructure is in a worrying state and the government needs to do something
to improve their public sector.
Education:
South Africa education system is one of the country’s major concern right now. The
problems that the apartheid rule left behind are still affecting the education sector and
this is mainly due to 1953 Bantu educated law which was done to disenfranchise the
black population both from the political system and the economy. Now due to this law
a major chunk of the population was left uneducated or were not given a chance to
excel. Today, the government spends a considerable amount their budget on education,
but the progress made till now is still inefficient to the needs of the country and its
black population. The disparity in form of education varies alot between the rich and
poor. The schoolinfrastructure on black population side oftown is very poorand even
though a vast amount of the budget is set aside for education, there has not been a
significant improvement in these areas. The major problem that’s been identified are
the administrative and corruption issues.
Due to various such reasons it has resulted in the growth of private-school market in
the country. There has been a constant decline in the public schools’ sectors which has
led middle class families to enroll their children in lower-cost private schools in greater
numbers. The poor people are sacrificing a significant chunk of their income to send
their children to such schools. The government needs to do something to improve the
state oftheir public schools. Despitethese shortfalls, the years ofinvesting in education
by the government have had a real impact as the literacy rate has been growing as well
as the number of black population graduates have increased.
Despite falling behind in primary and secondary education, South Africa’s tertiary
education remains one of its most extensive and of highest quality on the African
continent. It attracts more foreign students than any other African countries and it is
the fourth most popular country in the world for a mobile degree in the world. South
Africa is a popular destination for so many international students due to its
affordability, ease of visa approvals, flexible admission policies and a stable and
peaceful academic environment.
Since 2014, however there has been a major shortfall of in-bound students due to the
change in immigrant laws. The funding crises and the price hike by the universities
have led to many violent protests across universities in the country. This has made this
sectorunattractive and the government’s decision of allowing universities to hike fees
as much as 8% has led to more protests. Theentire sectorrequires more policy changes

and investments and the government has been trying to come up with schemes to fix
these problems. The government has released a National Development Plan for 2030
to improve the funding problem and to improve the participation of the black
population. A lot more reforms are on the way majorly focusing on getting more high
schools graduates, improving the public-school infrastructure and getting qualified
teachers for high schools.
Infrastructure Facilities:
Over the pastfew years the economyofSouth Africa has been slowing down and being
second largest economy in Africa it is a very worrying sign. There may be a lot of
opportunity, but it is highly impaired by challenges, the country’s past as well as
inefficient implementation of policies have hindered potential growth. The gap
between the rich and poorhave been constantly increasing. On one side there are huge
mansions of the rich but at a short distance it has townships full of poverty laden
population.
Though South Africa boasts ofgood infrastructure, a well-developed financial system
and sound social innovation capability it has been hindered due to increasing crime
rate, poor security and a problematic labour market. Along with the above problems
the tenure of their ex-president Zuma which was filled with corruption and illegalities
has led to this mess.
In the country’s preparation to 2010’s FIFA Football World Cup, the government
invested heavily in building 10 stadiums and on increasing the efficiency on energy,
transport and telecom infrastructure. After this the government has been steadily
investing in construction of ports, roads, railway systems. Electricity plants, hospitals,
schools and dams over the years to contribute to a faster economic growth. The
government has invested in 18 Strategic Integrated Projects (SIPs)which would cover
the social and economic infrastructure across all nine provinces of the state. This
includes catalyst projects that will fast track development and growth. The government
is also taking other measures to improve efficiency including introduction of incentive-
based funding approach to attract investors.
South Africa is ranked as one the world’s most unequal societies, and this have led to
increase in crime in the country as well as the leading to mass unemployment. The
country has been plagued by rising crime and the increasing gap between the rich and
poor. During the past years the investment by the private sector has been slowing as
the private sector has been facing recession, which is said to continue for a few years
now. The governments plan of building everything on its on is increasing the burden

on the government and they should enlist the private sectorhelp by focusing more on
infrastructure economy than its social as the private sector will be more inclined to
invest in infrastructure sectorthan in social. Anyways rail or road would do more than
hospitals to catalyst private sector investment. The government should work more
closely with the private sectorfor infrastructure investment by removing restriction on
private investments and relaxing labour laws. The electricity crisis that the country is
facing is one ofthe major reasons forloss of investments and governments should come
up with more water conservation measures and setting up of more nuclear plants.
South African government has increased FDI in their country so as to attract more
foreign investors. The government places to many requirements on its state-based
enterprise which is slowing the growth. The Government has made it mandatory for
foreign companies to work with the local market to develop the economy. With Cyril
Ramaphosa named as the new president there is a surge of optimism in the nation that
was plagued by the shortfall of the previous government. A lot has being expected out
of the president to improve the stifling state of the economy and to fix the mess left by
the previous government.
Cultural and Social Issues:
The end of apartheid in 1994 was largely a welcome move to the country but 25 years
on there is still a divide between the citizens. The cultural and social issues the country
is facing is due to increasing internal migration, unemployment, income disparity, and
health problems.
 Internal Migration: Increasing Internal migration that is happening all over the
country, the influx of people into already populated areas presents opportunities
as well as challenges the main challenges this poses to the government is
increase its funding on the social infrastructure by opening more schools,
hospitals, sewage systems, policing and electricity. The government has worked
hard on these factors and has been able to meet the problem head on but in some
time the problems are going to increase, and it reduces the possibility of
investing in other states.
 Unemployment: The increasing unemployment rate in the country is one the
main issues faced by the current government as the rate is around 26% and youth
unemployment is around 50% which is a major chunk of the population. The
jobseeker demand has been increasing and the growth rate in agriculture and
manufacturing sector has been stagnant resulting in less jobs. The skill labour
growth has been in state of decline due to inadequate training and uneducated

workforce. The youth unemployment sign is one of the most worrying sight of
the economy as they form 30% of the entire population. This unemployment
state has resulted in increased drug addiction and increasing crime rate.
 Education: The state of education in the country is one of the major factors in
the current state of economy. The disparity in form of education varies alot
between the rich and poor. The schoolinfrastructure on black population side of
town is very poor and even though a vast amount of the budget is set aside for
education, there has not been a significant improvement in these areas. The
major problem that’s been identified are the administrative and corruption
issues. The literacy rate and shortage of supply of quality teachers has been a
major issue in the education sector, this coupled with corruption at various level
of the education sector has resulted in a sorry state of public schools and has
attributed to the rise of private-school market in the country.
 Health- Diseases have been affecting the country for a long time now and the
increase in the number of communicable disease as well as non-communicable
diseases has plagued the country for some time now. Despite continuous effort
by the government, it hasn’t been able to curb the problem of HIV and
Tuberculosis.
Like many other countries South Africa is also facing a lot ofsocial and cultural issues,
if it has to overcome this cycle of poor health , education, high unemployment and
economic disparity then the government has to make several commitments byspending
on health and education with equally spending on infrastructure to help address the
social and cultural issues that plagues the country.

Double Taxation avoidance policy:
South Africa has a broad network of double taxation treaties. Subject to certain
conditions, relief from South African tax will generally apply where the individual
is a tax resident for treaty purposes in the other country/territory and is in South
Africa for less than 183 days in a 12-month reference period, as defined in the
relevant double taxation agreement. If the employee is paid by a resident South
African entity (or provided with local benefits) or their remuneration costs are
recharged to a South African entity, or attributable to a South African permanent
establishment (PE), however, this relief will typically not apply to that remuneration.
ForExample: The government ofSouth Africa and the government ofIndia came into
an agreement for the avoidance of double taxation and prevention of Fiscal Evasion
with respectto taxes on Income. This amendment to the agreement was signed at New
Delhi on 4th December 1996 and it amended section 90 of the Income Tax act, 1961. It
was further notified in terms of Article II ofthe protocolthatthe date ofentry into force
is 26 November 2014. After the agreement took placed the Article I of the agreement
was deleted and replaced by the following.

Article 25: The following points were noted down in this article:
1. The exchange of all relevant information was to be done by the consenting
countries ofthe agreement in terms ofenforcement of enforcing laws concerning
taxes of every kind.
2. Any information received by the concerning state should be kept confidential
and only be made public in front of a public court proceeding or in judicial
decisions.
3. If the information required by the concerning state is not essentially required by
the other statefor its own tax purposes, itis still obliged to obtain the information
for the concerning state.
4. In no case should the provisions of the paragraph 3 permit the contracting state
to decline to supply the information required solely dur information being held
by a bank and other financial information.
Article II:
Each Contracting state has to notify the other in writing, through their diplomatic
channels. The protocolshall enter into force 30 days after the date of receipt of the
notification and the provisions shall have effect on that day.
Article III:
The protocolwhich plays an integral part ofthe Agreement will remain in forceas long
the Agreement stays in force.
This one example of a DTAA agreement that South Africa has with another country,
like this there are many agreements in place with many countries. South Africa has a
broad network of double Taxation Treaties.
Since there is no dual taxation, countries that have double taxation police become a
lucrative hub. This gives a major boost in foreign investment and its subsequent
development. It is also beneficial to the citizens abroad and it also provides formal and
informal trust between the countries involved. DTAA was made with an intention of
easing tax matters and promoting investing. South Africa has been doing really well in
this front as it has been able attract a lot of investors.

How their bilateral trade agreements affect India.

government is working towards making South Africa a more attractive destination
for foreign investment. They are currently improving their investment environment

by working diligently towards ensuring policy certainty and consistency, improving
the performance of State-owned enterprises and consolidating fiscal debt.
The major investors in South Africa are Netherlands, United Kingdom, US , China
, Australia and Japan. Most of the investment went to financial, mining,
manufacturing, transportation and retail sector. Nearly all business sectors are open
to foreign investors. Government approval is not required and there are few
restrictions on how or how much foreign entities can invest. Additionally, the
Government has put in place various measures to encourage foreign investments,
including simple tax rules, investment incentives, a better regulatory policy on
competition and protection of intellectual property. Below are a few examples of
these measures:
 The Foreign Investment Grant, a cashgrant, which provides up to 15% of the
value of new machinery and equipment.
 The Skills Support Programme, which provides up to 50% of training costs
and 30% of workers' salaries.
 The Industrial Policy Project programme, which offers tax allowances.
Despite these measures and a developed economy, some elements may indicate that
the government is not convinced of the importance of FDI. Thus, some laws are
approved without an initial analysis of the consequences they may have on certain
economic sectors.

Recommendations to strengthen economic relations:
“South Africa is part of many bilateral and multilateral agreements. This has provided a
boostfor the economy of the country. The country has been focusing on fostering peace
as well as providing mediation and conflict resolution to conflict laden regions. The
country also helps providing reconstruction and development to the conflict laden places.
South Africa is part of major international bodies like UN, G20, G77, IBSA or BRICS it
always tried to put forward its agenda.
Despite its influence in the region SouthAfrica now needs to focus on creating a safe and
corruption free environment for the investors to come and invest in the country. China
being South Africa biggest trade partner has planned to invest $10 billion in the country
to fund states infrastructure and industrial development projects. To attractmorecountries
to invest in South Africa the government has to take measures to rid the country of
corruption and to improve its image to the world.
South Africa has cordial relations middle east and has deals in place to bolster their
growth by investments from these regions. The country has been plagued by crime and
diseases which does not make it seem lucrative to invest in the country. The state of
the economy needs to improve and if it does then there is a potential for increased
international trade with the US. Because of its market size and economic position,
South Africa is well placed to grow as a key U.S. investment and export destination in
Africa. This may also be aided by ongoing U.S. government and private sector efforts

to expand trade and investment ties—including by tapping opportunities created by
South Africa’s long-term infrastructure investment efforts.
There is also possible scope for greater U.S.-African cooperation regarding
development in South Africa and the sub-continent more broadly, as demonstrated by
South Africa’s role as a strategic partner under the Feed the Future and TAP programs.
USAID’s Power Africa program is based in South Africa and could potentially play a
role in helping South Africa to address its electrical sector challenges. South Africa
could also provide a source of partnership and potential.”
Conclusion:
After doing the country risk analysis for South Africa, we find it an attractive
destination for investment. The country has been facing a lot ofissue in recent time but
with the new government there is finally hope that the country is moving towards the
right direction. The past legacy of the country and the illegalities done by the previous
government has left a black mark on the country but with government measures and
investment there is hopethat the obstacles will be overcome. There is hope for the first
time. There are lot of issues that plague the nation like corruption, economic disparity,
education , health but with time this obstacles can be overcome. The rising levels of
inequality and unemployment are a worrying but the policies by this government to
attract investment and strengthening of trade relations will go long way in helping
overcome these issues.
The increase in the FDI and governments schemes to get the private sectorto invest in
the country will definitely attract investors and makes South Africa a suitable country
to invest in.

Country Risk analysis of South Africa

Country Risk analysis of South Africa

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