Our comprehensive assessment of South Africa's operating environment and the outlook for its leading sectors are formed by bringing together a wealth of data on global markets that affect South Africa, as well as the latest industry developments that could impact South Africa's industries. This unique integrated approach has given us an impeccable track-record for predicting important shifts in the markets, ensuring you’re aware of the latest market opportunities and risks in South Africa before your competitors.

Country Risk

South Africa Country Risk

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Core Views:

  • The South African economy will grow at a tepid rate over the medium term, with real GDP expanding by just 1.8% in 2014 and 2.3% in 2015. Our below-consensus view is predicated on several factors including weak investment sentiment and the ongoing retrenchment in the gold and platinum mining sectors.

  • South Africa's current account deficit will shrink to 4.6% of GDP in 2014 and 3.9% in 2015 - following a shortfall of 5.8% in 2013 - thanks to recovering export growth and subdued import demand. The deficit will be covered by capital and financial inflows, meaning that a repeat of the sharp rand depreciation seen in mid-2013 is unlikely.

  • President Jacob Zuma's position looks more secure due to the relative success of the ruling African National Congress at the May 2014 elections. The composition of the new cabinet suggests that more...

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South Africa Operational Risk Coverage (9)

South Africa Operational Risk

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BMI View: South Africa is a low risk country by regional standards, al though not the most attractive due its limited and largely unskilled labour force, powerful unions, high crime rate and underdeveloped utilities infrastructure. However, in spite of these detrimental considerations, the limited security risks, well regulated open market and good quality transport network serve to reduce overall o perational R isk s and boost the final score. South Africa is a regional leader for Operational Risk, sitting just behind Mauritius in our total Operational Risk ratings, with a score of 5 4 .9 . 

...

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South Africa Crime & Security

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BMI View:  Due to its strong military, relative dearth of territorial disputes, and minimal terrorism threats (thanks to a limited presence on the international stage), crime represents the greatest security risk in South Africa, particularly for foreign workers. The biggest threat to investors stems from the country's high crime rate with ATM scams, street muggings, car-jackings and burglaries a regular occurrence across the country. This threat is reflected in South Africa's underwhelming score of 26.7 out of 100 for Crime Risk; 28th highest in the region. Moreover, an ineffective and corrupt police force leaves businesses reliant on costly private security services to protect their assets. In light of this, we have awarded South Africa an overall Crime and Security risk score of 58.4 , leaving it in fifth place regionally, and 8.9 points behind regional leader Lesotho....

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South Africa Labour Market

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BMI View:  Overall, South Africa is one of the regional outperformers with regards to Labour Market risks, with high tertiary education levels, a growing pool of skilled workers, of which females comprise a substantial component, and relatively low non-labour workforce costs. However its overall rating is depressed by the heavy regulations governing workforce demographics, powerful unions keeping wages up and 25% unemployment.  Overall, we give South Africa a total L abour Market Risk rating of 45.2 out of 100 in our Operational Risk Index. This puts it in 5 thplace in Sub Saharan Africa (SSA), between Rwanda and Botswana , and behind regional leader Mauritius.

There are significant risks to...

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South Africa Logistics

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BMI View: South African supply chains are reliant on a relatively superior quality transport network, and are subject to lower barriers to trade in terms of import and export costs compared with the rest of the Sub-Saharan region. However, both water and power shortages threaten the long-term growth of the South African economy and pose high risk to investors considering expanding their operations to this market. These factors are highlighted in the country's score of 55.6 out of 100 in the BMI Logistics Risk Index, which makes it a regional outperformer in Sub-Saharan Africa, placed second behind Mauritius, and ranking the country in 60th place out of 170 states globally.

Supply chains in South Africa benefit from a relatively developed transport network, thanks to heavy investment in infrastructure, but we warn that this investment must continue if the country's transport system is to keep...

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South Africa Trade & Investment

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BMI View: South Africa is one of the most attractive and stable countries in the region, offering a well defined and implemented legislative environment with good contract enforcement and strong intellectual property protection. Although we expect investors to continue to be deterred by the lack of reliable transport and utilities infrastructure, and overregulation of the labour market, we see little in the way of direct trade and investment risk, particularly given government support of pro-market policies. We have given South Africa a score of 60.5 for Trade and Investment Risks. This puts it in 2 ndplace overall, betwe en Mauritius and the Seychelles . South Africa's score has been boosted by its strong financial market development, limited red tape, and well developed and enforced regulatory...

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South Africa Industry Coverage (24)

Agribusiness

South Africa Agribusiness

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BMI View: We hold a positive view on the South African agricultural sector and see particular growth potential in the grain and livestock sectors. Both sectors' growth will be boosted by regional export demand. The sugar sector also presents interesting growth opportunities, mainly thanks to renewed investment and improved technologies. Overall, the country's grain and livestock producers have been hit by recent hikes in grain prices and subdued corn supply on the domestic market. Margins have plummeted, and foreign competition for exports has made it even more difficult for producers to stay afloat. However, the recovery is under way. We believe the country's main companies, AFGRI , Rainbow Chicken and Astral Foods , can only see profitability bounce from current subdued...

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Autos

South Africa Autos

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The outlook for South African new vehicle sales has deteriorated rapidly over the past quarter, with the wider domestic economy risking moving into recession, following the release of Q114 GDP figures, which showed a 0.6% contraction quarter-on-quarter (q-o-q).

Figures from the National Association of Automobile Manufacturers of South Africa (NAAMSA) showed that total new vehicle sales were down by 22% year-on-year (y-o-y) over the first five months of 2014, at 212,103 units. Breaking down the headline sales figure for May 2014, passenger car sales were down by 11.3% y-o-y, at 32,984 units, with LCV, bakkie and mini bus sales down by a smaller amount, 5.1%, at 13,866 units. Medium and heavy trucks showed a fall of 14.4%, at 140 units, while heavy trucks and buses showed a slight gain, up by 4.3%, at 74 units sold over the month.

Consequently, BMI would share NAAMSA's view that the domestic...

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Commercial Banking

South Africa Commercial Banking

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...
Commercial Banking Sector Indicators 
Date Total assets Client loans Bond portfolio Other Liabilities and capital Capital Client deposits

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Consumer Electronics

South Africa Consumer Electronics

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BMI View: Sams ung 's plan to invest in a local production facility underscores South Africa's regional hub status. There are strong attractions to establishing a local production facility in South Africa, including government incentives, domestic and regional market size and external factors such as infrastructure and labour availability. However, a high level of union activities and a rising labour cost base threaten the long-term viability and sustainability of a production base in the country.

 

Headline Expenditure Projections

  • PC sales: USD3.8bn in 2013 to USD3.3bn in 2014. Forecast in US dollar terms reflects the impact of currency weakness and decline in demand for PCs.

  • AV...

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Defence & Security

South Africa Defence & Security

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We expect the South African defence budget to reach USD3.6bn in 2014. For the remainder of the forecast period, up to and including 2018, we expect the defence budget to rise, with the country spending on average USD5.3bn on defence annually. The final year of the forecast period (2018) will see defence spending reach USD6.8bn.

Between 2001 and 2011, the SANDF has comprised an average of 68,400 personnel. The numerical size of the armed forces has fluctuated widely between the 55,000 personnel they possessed in 2004 to the personnel strength of 103,000 recorded in 2006.

We have given South Africa an overall security risk rating of 75 for Q414. We believe that the country has a very low risk of becoming involved in a major international conflict. Secondly, the country is considered very unlikely to experience a major terrorist attack. However, the same cannot be said regarding crime with the country maintaining a...

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Food & Drink

South Africa Food & Drink

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BMI View:  The latest data support our view for slow economic growth in South Africa. Although headline real GDP growth rebounded to 3.8% at a quarter-on-quarter seasonally adjusted and annualised rate (SAAR) in Q413, from 0.7% in Q313, the number was boosted by a decline in imports which likely signals a degree of economic rebalancing wherein the consumer sector adjusts to the weaker rand by reducing demand for imports. Meanwhile, consumer spending as a whole remains relatively tepid, which will limit sales growth for the sector in the near term.

Headline Industry Data

  • 2014 per capita food consumption (local currency) = +7.7%; five-year forecast compound annual growth (CAGR) to 2018 = +8.6%.

  • 2014 soft drinks volume sales = +8.2%; forecast compound annual growth to 2018 = +5.8%

  • 2014 mass...

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Freight Transport

South Africa Freight Transport

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BMI maintains a cautiously optimistic stance with regards to South Africa's freight transport sector in 2014. Although there are risks to the mining sector from a potential hard landing in China, our Mining team believes that growth will continue, which bodes well for the rail and port sectors in particular. However, imports of containerised goods could struggle to maintain volumes as the central bank embarks on a rate hiking cycle. We have moderately downgraded most of our forecasts for the country following the release of full-year 2013 data.

Headline Industry Data

  • Rail freight growth will be 3.0% in 2014, and will average 3.3% to 2018.

  • Richards Bay Port's tonnage throughput in 2014 is forecast to increase by 4.2%. Over the medium-term we project a 4.8% average annual increase.

  • 2014...

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Information Technology

South Africa Information Technology

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BMI View: IT spendi ng in South Africa is mainly driven by the government and large enterprises . However , there is growing interest in IT solutions among small and medium-sized enterprises ( SMEs ) looking to explore new sales and marketing channels as well as improve their operational efficiencies. SMEs have increased their spending on IT systems in recent years as they upgrade PCs and servers, while also starting to adopt enterprise applications and cloud-based solutions. This trend, which is partly driven by the rapid expansion of high-speed broadband networks, creates significant growth opportunities for IT products and services vendors considering the potential of South Africa's SME sector.

We expect...

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Infrastructure

South Africa Infrastructure

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BMI View:  We believe the South African construction market is now on a sure footing to  reach  our forecasts for 2014 real industry growth of 3.4% year-on-year, with upside potential increasing. The residential and non-residential sectors, in particular, are showing signs that activity is set to increase. We expect that following the comfortable majority won by the ANC, led by President Jacob Zuma, in the May 2014 elections, that infrastructure projects will now move forward. 

The residential and non-residential sector has been performing well, with Group Five, the construction major with most exposure to the housing sector, outperforming its peers. A push to move all people into formal accommodation by the government and the legislation for the promotion of Special Economic Zones (SEZs) should act as additional drivers...

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Insurance

South Africa Insurance

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BMI View: The headwinds in the South African economy have weighed on both life and non-life insurers in 2014. However, we see the life sector as being able to ride out the storm better due to the more diversified footprint of the larger life insurance players across the whole of Africa. Over the 2015-2018 per iod, we expect total gross premiums to average 16.0% annual growth and we see the life segment outperforming the non-life segment during this period.

The South African market is facing a myriad of headwinds in the short term, which has hurt margins of insurers and slowed the industry's gross premium growth. Some of these short-term challenges include a sluggish economy, industrial action, an erosion of consumers' purchasing power due to rising inflation, and a weakening local currency. While we...

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Medical Devices

South Africa Medical Devices

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Espicom Industry View :   The medium term prospects for the medical device industry look encouraging; based on current trends, the market, of which over 90% is supplied by imports, is expected to grow at a CAGR of 5.6 % from 2013-2018. A key driver of growth is expected to be the public-private partnerships to develop hospitals in South Africa but this could be tempered slightly, by a depreciating rand against the US dollar and the general state of the South African economy.  The long term growth prospects of the South African medical device market will be strongly influenced by the ANC government's policies in regards to the new National Health Insurance (NHI) scheme, the promotion of public-private partnerships to develop and upgrade hospitals, the serious shortage of healthcare...

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Metals

South Africa Metals

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BMI View:   South Africa's metals industry will continue to see subdued production activity due to prices remaining below multi-year highs,   elevated energy costs , and labour unrest . Metals consumption growth will rise faster than production growth , due to solid demand growth from the auto, construction, and infrastructure sector s .

Our metals consumption outlook remains constructive on the back of our expectations for broader economic growth in South Africa in the coming years. We see autos...

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Mining

South Africa Mining

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BMI View: The past decade of minimal growth in South Africa's mining sector is set to continue as the country's gold and platinum sectors face diminishing margins and industrial strife. Potential for growth in the iron ore and coal sectors constitute bright spots for the mining industry in the long term. We expect South Africa's mining industry value to grow by an annual average rate of 0.8% between 2014 and 2018, from USD32. 4 bn in 2013 to USD33. 5 bn in 2018.

South Africa's share of global mined output is set to decline as other mining jurisdictions experience faster rates of growth. We expect investment, particularly in gold mining, to be more attracted to low-cost, high resource opportunities in the rest of the continent such...

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Oil & Gas

South Africa Oil & Gas

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BMI View: South Africa's oil and gas sector is set for growth, as an upsurge in exploration and the increasing prospectivity of the country's offshore acreage point towards considerable upside potential for the country's long-term upstream prospects. The country also has vast unconventional resource potential, and with growing political support lifting the moratorium on hydraulic fracturing, we could see shale development permits issued as early as H1 2014. However, the passage of the mineral and petroleum resources development bill has caused widespread unease in the industry, and deep regulatory uncertainty may cloud the country's long-term oil and gas outlook, unless the government can offer greater clarity to potential investors.

The main trends and developments in South Africa's oil and gas sector are:

  • Interest peaked in South...

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Petrochemicals

South Africa Petrochemicals

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South Africa's polymers markets are in contraction due to the weakening of the rand and the downgrading of the country's credit rating, according to BMI's latest South Africa Petrochemicals Report.

The failure of the rand to recover ground and its deterioration in Q214 has made it difficult to do business, particularly importing raw material which has risen in cost as a result. While the level of demand is similar to 2013, market sentiment is deteriorating with little upside and significant uncertainty. Ratings downgrades in the wake of a strike in the platinum sector has damaged the petrochemicals market, which is reliant on the consumption of plastics in the mining sector.

  • Industrial unrest coupled with poor market performance has contributed to our bearish forecast of total vehicle production growth of 2.0% in 2014, a downward revision from 2.7% growth forecast in the previous...

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Pharmaceuticals & Healthcare

South Africa Pharmaceuticals & Healthcare

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BMI View: South Africa is the best investment opportunity for multinational drugmakers seeking to enter the African market - boasting the largest medicines market on the continent and po i sed for high single-digit growth over the next decade.

Headline Expenditure Projections

  • Pharmaceuticals: ZAR34.01bn (USD3.52bn) in 2013 to ZAR37.53bn (USD3.51bn) in 2014; +10.3% in local currency terms and -0.5% in US dollar terms. Forecast broadly in line with Q114.

  • Healthcare: ZAR301.49bn (USD31.24bn) in 2013 to ZAR327.69bn (USD30.62n) in 2014; +8.7% in local currency terms and -2.0% in US dollar terms.

Risk/Reward Rating

Despite the...

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Power

South Africa Power

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BMI View:   Our fundamental assumptions of the market continue to be relevant and therefore our short- and long-term forecasts remain mostly unchanged . Eskom continues to struggle to supply reliable and stable power to the population and industry Delays in bringing large-scale power capacity online and insufficient investment in the sector have left South Africa vulnerable to power shortages, evidenced by the recent rolling blackouts in March 2014. That said, we see some positive development in the renewable sector which has led us to t his upwardly revise our wind and solar capacity and generation forecasts for the country this quarter. The attractive regulatory environment, high investor interest, the strong project pipeline and...

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Real Estate

South Africa Real Estate

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BMI View:   We believe that the real estate sector in South Africa will remain stable , but there are downside risks to our forecasts as a result of macroeconomic headwinds affecting the sector. We believe that the most significant opportunities lie within the retail sector, although over the long term, there is significant opportunity for commercial real estate firms to cater to businesses setting up in South Africa with a view to expanding elsewhere on the continent.  

Over the short term we are fairly pessimistic for the commercial real estate market. High inflation, low GDP growth and a slowdown in major trading partner China will all have an impact on the sector, whilst rising living costs and interest rates will affect personal consumption. This will lead to low growth in rental rates in the short term, and we would...

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Renewables

South Africa Renewables

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BMI View: We have upwardly revised our wind and solar capacity and generation forecasts this quarter as the South African renewables market continues to strengthen. The attractive regulatory environment, high investor interest, the strong project pipeline and lack of delays in bringing projects online underpin our positive outlook for the sector.

We have been following the South African Renewable Energy Independent Power Producer Programme (REIPPP) since inception in 2011, highlighting that the programme has gone from strength to strength. Investor interest has been notably high amongst European companies - such as Mainstream Renewable Power, Total, Enel Green Power, EDF and Vestas - who are looking for attractive alternatives to their flat domestic markets.

...

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Retail

South Africa Retail

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BMI View:   Retail sales growth has slowed in 2014 as rising interest rates and weak confidence have take n their toll on the South African consumer. Additional negative factors include rising living costs and high unemployment. Looking beyond 2014, we expect slow but steady growth, forecasting annual economic expansion of 2.3-3.1% over 2015-2018. The country's increasingly sophisticated urban population and expanding black middle class with money to spend on non-essential items such as clothing and furnishings will result in a steady rise in household spending across all retail subsectors over the next few years. We are particularly bullish about the future growth prospects for restaurant & hotel spending, as well as for education and personal care....

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Shipping

South Africa Shipping

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Growth at South African ports is threatened by the global headwinds that are posing challenges for the country as a whole, namely the China slowdown and the drying up of foreign inflows due to the raised possibility that the extraordinarily loose monetary policy that has been the norm in the US is tapered off. However, with continued investment in facilities, growth in private final consumption, and ever-expanding coal exports, we forecast growth in both total tonnage and container volumes at South African ports in 2014.

Headline Industry Data

  • Richards Bay Port tonnage throughput in 2014 is forecast to increase by 4.2%. Over the medium term to 2018 we project a 4.8% average annual increase.

  • Port of Durban container throughput is forecast to grow by 2.0% in 2014. Growth will average 2.8% per annum in the medium-term forecast period to 2018.

    ...

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Telecommunications

South Africa Telecommunications

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BMI View: The arrival of MrP Mobile and the possible entry of more MVNOs will impact on overall competition dynamics in the mobile market. The increasing fragmentation of the mobile sector amid market saturation (penetration rate reached 151% in H114) will intensify price competition in the basic voice and data markets and, consequently, increase the downward pressure on operators' ARPUs. This scenario is in line with BMI's view that operators must move quickly to develop new revenue streams to offset the impact of declining voice revenue growth.

Key Data

  • The mobile market grew by 4% q-o-q in Q212 to bring total growth in H114 to 8.1%.

  • Market average ARPU declined by 13.6% in H114 to its lowest level ever following the the implementation of lower interconnection rates in April 2014.

  • ...

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Tourism

South Africa Tourism

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Arrivals data released by South Africa's Ministry of Tourism in May 2014 show 9.7mn tourists travelled to South Africa in 2013, an increase of 4.7% year-on-year (y-o-y). The majority of inbound tourism arrivals to South Africa come from elsewhere in the continent. Some of these arrivals very likely include nationals of other African nations coming to South Africa to find jobs or visit family members. In 2013, South Africa saw a total of 7.1mn arrivals from Africa, up by 6.2% y-o-y.

The Department of Tourism concentrates on what it calls 'overseas arrivals' (ie non-African). Of these markets, Europe remained South Africa's strongest source of overseas tourist arrivals in 2013, with the number of visitors growing by 4.5% y-o-y, to 1.4mn. Asia also showed good growth, with arrivals up by 11.7%, to 577,840, on the back of ongoing strong demand from China and India. Latin American arrivals were up by 3.8%.

Looking at key...

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Water

South Africa Water

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BMI View:   We have maintained our water forecasts this quarter, as South Africa's water industry continues to remain comparatively strong, with a large amount of projects in the pipeline. However in the wake of the recent announcements of future projects and legislation by the new Water Minister, we anticipate an upside risk to our longer term forecasts, which we have not updated yet due to a lack of clarity concerning the actual form these developments will take. 

'We will move away from a one-size-fits-all approach, where every district or local municipality has the powers and functions of a water services authority, yet its viability and capacity is questionable,' said the new the Water and Sanitation Minister, Nomvula Mokonyane. She also emphasised a renewed focus on water access and bills, alongside the reduction of losses and improvement of overall...

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