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Is South Africa’s Growing Economy a True Emerging Market?

South Africa made a major step into the world stage when it was added to the BRIC (Brazil, Russia, India, and China) group of countries to form BRICS. It was a sign that South Africa's economy has

South Africa made a major step into the world stage when it was added to the BRIC (Brazil, Russia, India, and China) group of countries to form BRICS. It was a sign that South Africa’s economy has been acknowledged as a rising power, an emerging market with enormous growth potential and a massive population. South Africa currently has the largest economy on its continent, accounting for 24 percent of Africa’s cumulative GDP. It’s one of just four African nations that the World Bank has ranked an “upper-middle income economy” along with Botswana, Gabon, and Mauritius, and it’s the 25th largest economy in the world, according to the IMF’s calculations for 2011.

However, the South African economy continues to be plagued by serious issues. According to the World Factbook on the website for the Central Intelligence Agency, “Unemployment remains high and outdated infrastructure has constrained growth. … Daunting economic problems remain from the apartheid era – especially poverty, lack of economic empowerment among the disadvantaged groups, and a shortage of public transportation.”

The country’s infrastructure is still ailing and unemployment remains close to 25 percent, with about one quarter of the population surviving on $1.25 a day. While South Africa has a long way to go before really beginning to make a dent in its unemployment issue, the growing economy that warranted inclusion with the other major developing economies of the world certainly gives investors reason to believe that there’s real opportunity in South Africa.

GDP Growth Accelerating After Global Slowdown

The growth of the South African economy took a serious hit along with most of the rest of the world after the financial bubble burst in 2008. The nation actually saw GDP contract by some 1.7 percent in 2009 after experience robust growth between 4 percent and 6 percent for most of 2004-2007. Now, as the global economy slowly recovers, South Africa appears to be returning to the rate of GDP growth many think that it’s capable of sustaining. In the fourth quarter of 2011, the nation’s economy grew at an annualized rate of 3.2 percent, beating analyst estimates of 3.1 percent and spiking from the revised growth rate of 1.7 percent for the previous three months and giving the nation a growth rate of 3.1 percent for 2011. Now, the government has projected GDP growth for 2012 of 2.7 percent. This, though, remains below the 4 percent annual rate of growth that many analysts project as being possible for the nation.

One major factor for the growing South African economy is the rates of labor participation and unemployment. A July 2010 report from the Organization for Economic Co-operation and Development (OECD) found that only 40 percent of the working age population have jobs and, that while the unemployment rate was around 25 percent, that would increase to 35 percent if one counts those people so discouraged by the labor market they’ve stopped seeking a job. The nation’s Finance Minister, Pravin Gordhan, projected that the nation’s economy would need to grow at an annual rate of 7 percent a year for 20 years in order to reach full participation, a rate that the nation has not reached, let alone maintained, at any point in the last 40 years.

Gordhan, though, has plans for sparking growth and trying to tackle the nation’s unemployment issues. Most notably, Gordhan recently announced an ambitious new plan to invest in infrastructure throughout the country. In announcing the most recent budget plans, the first budget to exceed 1 trillion Rand, Gordhan highlighted some 43 new infrastructure projects with a combined cost of R3.2 trillion or $425.6 billion. All told, improved infrastructure will not only improve the quality of life for millions of South Africans, but it should also help in making the nation more appealing to international investors, particularly if the nation can tackle issues with shortages in electric capacity that led to nation-wide rolling blackouts briefly in 2007.

Gateway to Africa?

While South Africa’s infrastructure needs to improve to continue promoting economic growth, it remains one of the strongest in the continent, with a strong business infrastructure to support investors. As such, it’s possible that some of South Africa’s growth can be attributed to foreign investors seeking out opportunities in emerging markets. A recent World Bank study projected that emerging nations, including African nations, should grow at an average rate of 4.7 percent per year from 2011 to 2025, while advanced economies can be expected to average just 2.3 percent. With the debt crisis in Europe seeming to pop up again in a different form every time investors appear to be settling down, investment in African companies could seem like a particularly promising possibility.

For those investors looking for foreign direct investment (FDI) opportunities, South Africa could be viewed by many as a gateway to the rest of the continent. As the biggest economy on the continent by far, and a nation offering relative political stability and business infrastructure, investment in South Africa could be viewed as an appealing method for hitching one’s wagon to the potential held in growing African economies. This is not something that’s been lost on investors in South Africa, either, as they are dramatically increasing investment in the African continent. Last year saw a 70-percent increase in FDI projects in Africa by South African companies.

“Many African economies are looking at growth rates of 7 percent-plus while Europe is facing zero to 2 percent over the next few years,” said the CEO of Wesgro, the official Investment and Trade Promotion Agency for the Western Cape in Cape Town Nils Flaatten. “As I see it we have a three to five year window of opportunity before the rest of the world catches on. We will face competition not only from the usual suspects like China, India, and France, but also from the likes of Brazil and Argentina.”

The appeal of the South African economy has drawn the attention of a number of global companies, including Barclays (BCS), which purchased a majority share in Absa, one of South Africa’s “big four” banks in 2005, 20 years after divesting from the nation. Cisco Systems (CSCO) has had a presence since 1989, and General Electric (GE) is also breaking into the market.

“South Africa’s excellent infrastructure, together with first-class financial, legal and commercial systems, makes this country a natural location to pursue the significant opportunities of South and southern Africa,” said Michael C. Hendry, president of GE South Africa. “The friendly business environment ensures that we can run our business efficiently, and we look forward to successful and profitable operations in southern Africa that meet our global goals and create wealth for the GE shareholder.”