Political and Economc Analysis of South Africa - Case Study Example

Contents Introduction Launching yourself into international market requires a lot of research and background checks in order to properly assess the business climate there so that the company which is going to launch itself in the market must know what risks it is running in order to make an entry into an unknown markets. Thus doing business in the international markets carries risk which must be mitigated before deciding on making an entry into the market. With this in perspective, this report is going analyze the general environment of South Africa, one of the highly regarded emerging markets in the world to produce an general overview of the political as well as economic environment of the country and risk and rewards it can offer to an international company to make successful entry which can be sustainable as well as growing. South Africa- a general and historical overview South Africa has a long and rich history full of turbulent political periods as well as periods of strong economic growth. Dutch traders found the country in 1652 and established a stop over point between Netherlands and the East. The Britain entered into the country in 1806 when they captured the Cape of Good Hope. With the discovery of diamonds and Gold during late 19th century increased the economic significance of the country and mass immigration took place which resulted into the subjugation of the native black population. However Dutch settlers remained in the region and were later called as Afrikans or Boers. The so called Boer war which took place during 1899-1902 was between Boers and the Britain. However subsequently Boers and Britain ruled together under the flag of Union of South Africa and during 1948, the National Party was voted into power and instituted a policy of apartheid - the separate development of the races. The first multi-racial elections in 1994 brought an end to apartheid and ushered in black majority rule. Geography and Demographics of South Africa South Africa has a total area of 1,219,912 sq km with bordering countries of Botswana, Lesotho, Mozambique, Namibia, Swaziland and Zimbabwe. South Africa is rich in gold, chromium, coal, iron, nickel, tin, uranium, diamonds, gems, copper as well as natural gas. The overall population of the country is more than 40 million with most of the population ranging in the age rang of 15 to 64 years however there is a negative growth in the population of the country. Out of this population, 79% of the population is black African whereas white consists of only 9.6% of the population. The government type in the country is that of Republic whereas the whole state constitute of 9 provinces with Head of the State being called as the President. South Africa is an emerging country with its infrastructure still underdevelopment whereas the economy is slowly picking up due to its robustness and ability to sustain the international pressures. The following sections will present an economic as well as political analysis of the country with recommendations for whether the country is good risk to bet on for starting a new venture.1 (Agency) Economic Analysis of South Africa South Africa is considered as the Economic power house of the whole African continent with leading position in many different sectors or industries. The structure of the economy is mostly based on the industrial base of the country with only 2.7% contribution being made by the Agriculture sector toward the whole GDP as the reliance on the Agriculture as a basic tool of growth has declined subsequently over the period of decade. The industrial growth in the past decade have increase more than double and that consequently service sector is also increasing at enormous pace to accommodate the industrial and manufacturing growth in the country. It is largely argued that the supply side economics is working of South Africa as there are strong indicators of the supply side growth being one of the critical reasons behind this success. (Global Insight). The major contributors towards this development are finance and business services besides manufacturing sector remaining one of the strongest economic variables leading to the aggressive growth in the economy. Equally supporting this growth is the strong consumer spending which has over the period of time increased to a great length. While analyzing South African Economy, this report will broadly discuss following economic variables to assess whether how they support the proposed business opportunity and how they may indicate that doing business in this country is a feasible option. These variables will be discussed in following manner. GROSS DOMESTIC PRODUCT According to the World Bank, the GDP of South Africa has grew from USD 79.5 Million in 1986 to USD 255.2 in 2006, a growth of more than 200% in just a decade’s period of time showing the strongest economic performance of the country in terms of GDP Growth. (Bank). The year 2007 data suggested that the South African economy grew vigorously. “Annual GDP growth between 1994 and 2004 averaged 3.0%. In 2003, real GDP growth slowed to a rate of 2.8%, but increased to 3.7% in 2004. The government estimates that the economy must achieve growth at a minimum of 6% to offset unemployment, which is estimated at 28%, although unofficial sources put it as high as 41%. In an effort to boost economic growth and spur job creation, the government has launched special investment corridors to promote development in specific regions and also is working to encourage small, medium, and microenterprise development. One of the great successes of the ANC government has been to get consumer inflation, which had been running in the double digits for over 20 years, under control. By 1998, inflation had fallen to 6.9%, and in 1999 and 2000 inflation was running at less than 6.0%. The rands rapid depreciation in late 2001, however, led to greater inflationary pressure, causing 2002 inflation of 9.2%. The South African government cut the inflation rate to 4% in 2004, and the rand appreciated 39% from 2002 to 2004. The South African Reserve Bank increased interest rates and along with the 28% rand appreciation in 2003 led a reduced consumer inflation of 5.8%. The government also has made inroads into reducing the fiscal deficit and increasing foreign currency reserves. The government deficit was 1.1% of GDP in 2002 and 2.6% in 2003. The governments 2005 budget called for a moderate increase in spending to promote faster growth and poverty alleviation, while curbing budget deficits”. (US State Department) There are many economic variables which are considered as few of the reasons behind the strong growth of South Africa in terms of its GDP. Investment is one such economic variable which is believed to be contributing most to the increase in the GDP of the country. (Stone). This investment has been mostly done within the domain of the infrastructure development and other development especially real estate. Second important variable in this regard has been the consumer spending as there are strong indicators that the consumer spending will remain high in the future also with bright prospects that as the economy grow, the consumer spending will increase providing a very good opportunity for our country to launch itself at a very proper and crucial time. Foreign Exchange Rate Since the end of Apartheid in the country, Rand has substantially depreciated over the period of time. By the end of 2003, it was believed that it has almost lost 50% of its value with strong rumors that the growth in the economy is at the expense of increasing inflation rates within the economy. (Ricci). This reduction in the exchange rates is considered as disruptive as it may cause the damage to the growth of the economy especially in terms of high cost of hedging as it will hamper the trade flows which eventually will result into hampering the investment in the country. The depreciation foreign exchange rate may be one of the worrying signs for this company to launch itself In the market as the repatriation of profits from the country may not return the value in real terms as over the period of time, more Rands will return few dollars to us. Inflation Rates South Africa has a history of having very low inflation rates during 1970s however it has not remained the same as the growth in the economy also resulted into the higher inflation rates. During 1990s the inflation was as high as 9.3% however this increase in the inflation rates have been attributed to the conservative monetary policy stance being adapted by the central bank of the country. Interest rates The recent trends in the South African economy suggest that the interest rates are on hike and this trend is going to continue in the future too as in order to contain the inflation, government is trying to curb interest rates. Political Analysis South Africa is a multi-ethnic country with Blacks in majority and is ruling the country now. The country has a very long history of struggle against racism and other political inequalities. However the same seems to have changed as the country is now being democratically run with participation from all segments of the society making it politically more stable and strong country. This is one of the strongest factors of South Africa which can give our company a very bright hope to enter into a market which is less hostile politically towards the new entrants into the market. The current regime of President Thabo Mbeki is going to step down in 2009 and the process has already started to find out a succession to the same however it has also been argued that the political policies of the President Mbeki supported the white and international players to pursue their economic interests in the region. (Plau). This can be a very risk bearing for the company in the future because any political turbulence and shift in the Political policies may result into great risks to the economy. When National Congress of Nelson Mandela came to Power in 1996, they introduced the new government policy of GEAR i.e. Growth, Employment and Redistribution which was initially being skeptically viewed by many however this has yielded results for South Africa and now it seems that the Political Environment is corroborating the economic environment of the country. Legal Environment It is believed that South Africa has one of the most progressive legal systems in the world. It has the laws related to the competition, copyrights, patents, etc up to the international standards and that the laws relating to commerce are particularly well suited to the international environment. (Africa). Since most of the South African Law is governed under the Common Law therefore the laws are more or less of international orientation. However Index of Economic Freedom suggests that the South African Economy is only 63.2% free ranking it among the world’s 57th freest economy. (Foundation). The index also suggest that the South Africa’s overall score of Economic Freedom has declined over the last year as freedom from corruption and freedom of owning property rights are really lower suggesting potential risks in the business. Recommendations Based on the above analysis of the economic as well as political environment of the country, we believe that many changes have taken place in South Africa which is more conducive to conduct business in the region. The economic environment is largely favorable with emphasis on the supply side growth with consumer spending increasingly sharply over the period of time. This may however be taken as an strong signal to suggest that the country is more on the path of economic growth and the consumers within the country have faith that the harsh times may probably not come and that is the reason that a rational consumer spends when she considers her future economic outlook as stable and prospering. Any signs of worsening future expectations would certainly have increased the savings and decrease the spending which is however not the case with the country. Political trough is stable till now however as the future unfolds, any change in the government policies specially their liberal approach and openness to the external economic agents to do business in the country may create troubles however due to strong economic interests of other giants specially within the domain of gold, diamond and other precious commodities, there are lesser chances that the new government will take a U-turn on its predecessors policies of economic liberalization. South Africa, being the country with enormous potential, cheap labor sources and abundance of natural resources is a very breeding place for international business to grow. It will not provide our company a platform to tap into the other markets of Africa but also bring us on the forefronts of one of the leading emerging markets in the world. Due to its diversity, South Africa is a prospering risk to take. Works Cited Africa, South. "South Africa; Open for Business." 2008. www.southafrica.info. 27 March 2008 . Agency, The Centeral Intelligence. "South Africa." 2008. www.cia.gov. 26 Marach 2008 . Bank, The World. "South Africa at a Glance." 28 September 2007. The World Bank. 27 March 2008 . Foundation, The Heritage. "Index of Economic Freedom." 2008. www.heritage.org. 27 March 2008 . Global Insight. "GDP Growth in South Africa Well Anchored in Supply Side of Economy." 2007. www.globalinsight.com. 27 March 2008 . Plau, Martin. "South Africas Political Turmoil." 2006. Foreign Policy in Focus. 28 March 2008 . Ricci, Luca Antonio. "South Africas Real Exchange Rate performance." 2006. www.imf.org. 28 March 2008 . Stone, Carol. "South Africa Maintains 5% GDP Growth Trend, with 20% Gains in Fixed Investment." 22 June 2007. www.haver.com. 27 March 2008 . US State Department. " Background Note: South Africa." 2008. US State Department. 28 March 2008 . Read More