South Africa expanding regional trade links within Africa

In recent years South African companies, especially financial institutions, have harboured international ambitions, focusing on Europe and other developing markets. However, they are now starting to look closer to home.

With developed economies and Asian markets posting sluggish growth, South Africa is turning to opportunities elsewhere in Africa and working to bolster its position as the gateway to the rest of the continent. “We have some bright lights on the horizon. One is the rest of Africa,” said Jorge Maia, head of research at the Industrial Development Corporation, a self-financing national development finance institution.

Regional Strength 

The country remains an attractive gateway to the rest of Africa due to its sizeable economy and good business environment.

Until the rebasing of Nigeria’s GDP in 2014, South Africa was also the continent’s largest economy, and it still has a considerable advantage over other jurisdictions as a regional hub. The country offers the rare combination of sophisticated infrastructure, stability, highly skilled labour and a large domestic market.

According to EY, South Africa is the best country in Africa in which to do business by a wide margin. In the audit firm’s attractiveness survey in 2013, 41% of respondents rated the country as number one. The next highest in the rankings was Morocco, with 8%, followed by Nigeria, with 6%, and Egypt, with 5%. EY said that South Africa has a well-deserved reputation as the blue chip jurisdiction in the region, and this keeps international companies coming to and staying in the country.

Trade With The Neighbours

South Africa is quickly becoming more integrated in the region. Trade with the rest of the continent has been rising rapidly, and was up by 13.1% in 2014. A total of 30.1% of the country’s trade is with the rest of Africa, slightly less than the 31.2% with Asia. Economists feel that the continent could become South Africa’s largest trading partner in 2015.

Rising Competition

However, some observers argue that South Africa is facing increasing challenges to its status as the gateway to the region. New laws and regulations, ratings downgrades, problems in the mining industry and slowing foreign direct investment have all had an impact on the country’s reputation in recent years.

Furthermore, the rest of Africa has been looking to their southern neighbour and seeking to replicate its growth model. In terms of infrastructure, other countries are now building facilities as good as those in South Africa. Additionally, South Africa is losing its regional monopoly on grade A office space and good telephone connections.

Changing Role

Now, for some multinationals, it may make sense to go straight to the specific target market, rather than use South Africa as a base. The country still has a unique role in Africa and is a place of opportunity as much as anywhere else in the region, but the case to use it as a jumping off point is not as strong as it once was. Companies are not as compelled nowadays to go via a gateway, and are more likely to go direct.

“South Africa as a gateway to Africa is a good story, but multinationals will set up where they want to expand their business activities,” Axel Schimmelpfennig, senior resident representative at the IMF, told OBG.

Despite the changing continental dynamics, the country will still benefit from the growth of Africa, both directly and indirectly. It trades in the region and is very actively investing there.

The equation may no longer be as straightforward as it once was, but South Africa remains strongly placed on the continent, and policy is being developed to help it retain its pole position.