Successfully investing in South Africa

last updated on 7 June 2024 | reading time approx. 5 minutes

How do you assess the current economic situation in South Africa? »
How would you describe the investment climate in South Africa? Which sectors offer the largest potential? »
What challenges do German companies face during their business ventures into South Africa? »
Is the end of the load sheddings in sight? »
In your opinion, how will South Africa develop? »

How do you assess the current economic situation in South Africa?

South Africa is in a difficult economic situation. The entire economy is suffering from the ongoing energy crisis, increasing water supply problems, corruption, mismanagement, high unemployment and crime.

Controlled power outages (“load shedding”) increased sharply in 2023, both in terms of the frequency of days affected by load shedding and in terms of the number of hours per day on which the power was switched off. However, the load shedding situation has eased significantly in recent months. The reasons cited include the large number of private investments in renewable energies and Eskom's increased maintenance efforts.

The unreliable water supply is another major problem for the South African economy. Due to dilapidated water infrastructure and corruption, there are increasing water supply failures in large parts of South Africa.

The forecast for 204 is an average inflation rate of 4.9 percent. In comparison, the average inflation rate for 2023 was 5.9 percent.

Despite the current low economic growth, South Africa remains one of Africa's key economies and Germany's most important trading partner in Africa. Around 600 German companies are active in South Africa.

How would you describe the investment climate in South Africa? Which sectors offer the largest potential?

For German companies looking to invest in the sub-Saharan region, South Africa continues to be an attractive business location and gateway to other markets on the continent.

The energy sector, in particular renewable energies, but also batteries and inverters, currently offer very good market opportunities. Municipalities, industry, companies and private individuals are very interested in independent power supply solutions due to the intensive load shedding phases and there are sometimes long waiting times for installations.

The infrastructure sector also offers great potential and the South African government is planning to involve the private sector more closely in this sector in the future.

The traditionally important mining sector offers very good prospects for foreign companies. In particular, rising commodity prices, partly due to strong demand from the People's Republic of China, and the increasing interest in the precious metal platinum (which is an important component of hydrogen-based drive technology) predict good economic prospects for the mining sector. The raw materials industry should therefore continue to grow.

The manufacturing industry (including food processing and packaging, the beverage industry, fertiliser production), automotive manufacturing, petrochemicals, medical technology and telecommunications also offer great potential for German companies.

Added to this is the rapidly advancing digitalisation, particularly in the areas of agribusiness, healthcare, education, information and communication technology (mobile radio networks, cloud solutions), trade and e-logistics.

What challenges do German companies face during their business ventures into South Africa?

The challenges for German companies in South Africa include “Broad-Based Black Economic Empowerment” (B-BBEE), immigration law, the country's volatile currency and load shedding.

B-BBEE aims to integrate the previously disadvantaged population more strongly into the South African economy. German companies should make themselves familiar with B-BBEE at an early stage, as an appropriate B-BBEE structure requires time, expert advice and often a local B-BBEE partner. Even if B-BBEE is a challenge for German companies, B-BBEE is an integral part of South Africa and should also be seen as an opportunity to participate in the country's transformation.

The legal situation in the area of immigration law remains critical and the secondment of employees from Germany must be well planned and organised in the long term.

The entry into force of the German Supply Chain Due Diligence Act (LkSG) on 1 January 2023 means a further in-house requirement for the relevant German companies that have South African suppliers. This is because they will have to rethink their global supply chains and reorganise themselves if necessary. The following due diligence obligations of the LkSG are particularly important for South Africa: prohibition of unequal treatment in employment and employee safety. With regard to employee safety, the risk of inadequate training plays an important role in South Africa.

Is the end of the load sheddings in sight?

Politicians have repeatedly held out the prospect of an end to load shedding in the near future. President Cyril Ramaphosa announced in February 2024 that the worst was over in terms of load shedding and that the end of load shedding was within reach. However, it should be noted that politicians have often made unrealistic promises in the past regarding an end to load shedding, so this message will also be received with caution.

An important hurdle in the fight against load shedding was overcome at the beginning of 2023. Since the beginning of 2023, renewable energy projects no longer require a power generation licence, regardless of the capacity of the power generation plant. In the past, the requirement for a power generation licence was one of the main obstacles for independent power producers. With the improvement in the legal framework, we recognise a significant increase in interest from German companies to enter the South African market. However, as these new projects take time, it can be assumed that load shedding will remain present for a few more years.

There are other problems that are preventing an end to load shedding. In times of power cuts, copper cables and other materials used in the country's electricity grid are stolen on a daily basis and must be constantly replaced. Mismanagement and corruption within Eskom are also clouding hopes for an end to load shedding.

In your opinion, how will South Africa develop?

South Africa is about to hold elections. On 29 May, the members of the National Assembly and the governments of the nine provinces will be elected. It can be assumed that these elections will end the 30 years of sole rule by the African National Congress (“ANC”). However, it is unclear with which opposition party the ANC would enter into a possible coalition and what impact this would have on the country.

It is to be welcomed that initial progress has been made or is planned with regard to the work visa problems for international companies. This includes the newly introduced “Trusted Employer Scheme”. Companies that have been registered and checked as trusted employers can obtain work visas for their employees with simplified requirements and shorter waiting times.

The planned remote working visa will also have a positive impact on the economy, particularly the tourism industry. This visa will enable foreigners to live in South Africa and work remotely for a foreign employer. Overall, the tourism industry has recovered quickly from the losses caused by the pandemic and South Africa is once again an interesting travel destination, especially for Germans.

It is expected that the share of independent power producers will continue to rise sharply and that the Renewable Energy sector will help to boost economic growth throughout the country.

In our view, South Africa will remain the key market entry country on the African continent. Despite persistent corruption and mismanagement, South Africa remains a favoured investment location due to its strong independent judiciary and high degree of legal certainty.