South Africa Economic Outlook - April 2024

Despite its challenges, South Africa is still receiving a steady stream of foreign direct investment inflows

South Africa received foreign direct investment (FDI) inflows of nearly R100 billion in 2023 as non-resident maintained a ‘moderately positive’ view on the country’s business ecosystem.  

Johannesburg, 29 April 2024 — PwC South Africa is pleased to share its fourth South Africa Economic Outlook report for 2024. In this edition, we focus on FDI and what South African companies can do to attract international deal interest.

It would come as a welcome surprise to many South Africans to learn that, despite the country’s many challenges, our economy still attracted almost R100 billion in FDI inflows in 2023 – equal to 1.4% of GDP. In fact, while some might expect South Africa’s investment outflows to be larger than inflows, the country has seen a net FDI inflow (inflows minus outflows) in every year since the global financial crisis.

South Africa has many positive attributes for foreign investors, including world-class financial services and communication industries, a deep capital market, quality tertiary institutions producing graduates with internationally-comparable qualifications, abundant natural resources (including renewables), a strategic geographical location for entry into the rest of Sub-Saharan Africa, a transparent legal system, and a certain degree of political and policy stability, among many other features.

The perception among non-resident of South Africa’s public governance and business ecosystem are ‘moderately positive’ on average, according to data and classifications from research by nation branding experts Bloom Consulting. PwC’s review of this data shows that international perceptions of South Africa’s public governance and business ecosystem echo the results from other international benchmarking reports: that South Africa’s performance is near the middle of the pack when countries are ranked, and not as dismal as some might think.

For example, when considering the country’s economy and business ecosystem, the average perception score between those familiar and those who are unfamiliar with South Africa indicate a ‘moderately positive’ view on the local business environment. This is in line with, for example, the Venture Capital & Private Equity Country Attractiveness Index 2023 produced by the IESE Business School that ranked South Africa 66th out of 125 countries. This placed South Africa near the middle of the country list – something to be moderately positive about – and in the company of countries like Malta, Croatia and Slovakia. 

Data from the South African Reserve Bank (SARB) shows that the cumulative value of foreign liabilities (inward investment stock) totalled nearly R3 trillion in 2022 (the latest available data). The manufacturing industry held the largest share, accounting for 38.5% of liabilities, followed by mining (24.2%) and financial services (20.0%). South Africa’s factory sector is home to production facilities owned by some of the world’s largest producers of vehicles, food products and building materials, amongst others.

To understand the economic impact of FDI, we modelled the contribution to the economy of a R5 billion brownfield capital investment in a local automotive manufacturing facility. This simulates the investment needed to upgrade an existing factory to produce a new model line. Investing this money in the upgrade of an existing plant – with 58% of the money spent locally and 42% on imported equipment – would create R3.5 billion in additional national GDP, create and/or sustain 9,000 jobs during the upgrade process, and contribute R673 million to the fiscus.

At a company level, the advantages of FDI are easy to comprehend. These include, among many other benefits, the expansion of business into new markets, cost reduction through economies of scale as part of a larger international commercial entity, and skills enhancement of domestic employees through exposure to new technologies.

In PwC’s experience, potential foreign investors are looking for three specific things from prospective investment targets in South Africa:

• A demonstrated track record of commercial sustainability across all the systemic crises the country has experienced over the last 30 years. This can be achieved through conducting a financial due diligence (FDD).
• Demonstrating that they are well positioned to maintain their performance into the future. That means having relevance in a growth industry underpinned by strong fundamentals. This can be achieved through conducting a commercial due diligence (CDD).
• Demonstrating capabilities that can be exported to solve emerging issues in other territories.

An FDD provides peace of mind to buyers by analysing and validating the financial, commercial, operational and strategic assumptions being made. It uses past trading experience to form a view of the future maintainable earnings, key value drivers, inherent risks in the business and confirms that there are no 'black holes'. In turn, a CDD assesses the historical and forecast assumptions and performance from the perspective of the markets, customers, competitors and internal capabilities of the organisation. The due diligence provides insight of the growth projections used as a basis for the proposed deal.

Key content in this report includes:

• FDI trends: South Africa continues to receive strong foreign investment inflows, with manufacturing the most capitalised industry.
• What non-residents think about South Africa: Moderately positive impressions of public governance and the business ecosystem.
• Illustrative example: Economic impact simulation of a R5 billion foreign investment in local automotive manufacturing.
• Shine your shoes: What South African companies can do to attract foreign deal interest.
• How PwC assists our clients with structuring investment deals and measuring the economic impact of investments.