Political risk based on BERI Index

Fractionalization of political spectrum

South Africa is a constitutional democracy with a three-tier system of government at national, state, and
local levels. Post-apartheid period since 1994 it is characterized by a system of universal adult suffrage and
multi-party democracy. ANC is the largest political party in South Africa and the ruling party (Tripartite
Alliance) since 1994 with over 56% vote share in National elections held in 2019. The declining clout and
dissatisfaction over ANC’s performance in recent years have been successfully exploited by the opposition
notably following the corruption scandals involving ZUMA and economic frontiers collapses. Also, the
intense internal rivalry in ANC has led to several political assassinations. Especially the appointment of local
body representatives and party members has often caused localized violence and fights in party cadre.

Divisions within the ruling ANC in recent years has led to several setbacks on the reformist agenda, as the
faction supporting earlier president ZUMA has tried blocking several reforms relating to energy and mining
segment. Separate state commissions of enquiry have examined malfeasance at various state agencies for
political purposes under ZUMA, which had led to widespread divisions between the competing factions of
ANC.

The long-term success of all political parties depends on their ability to draw support from the people born
after 1994 termed the “Born Free” generation as they comprise 47% of the population and have extremely
high levels of unemployment. The level of engagement is abysmally low for this generation in the politics
and voting due to discontent over several issues. The high levels of discontentment among Born free
generation, deep fractionalization in the ruling party and declining clout of ANC poses a moderate risk to the
stability at center in South Africa.

Fractionalization by language, race, religion

South Africa has a history of racial discrimination where apartheid, an institutional form of racial segregation
and discrimination existed from 1948 till 1990s between native majority black population and minority white
population. Demographically Black African, colored, and white people have 80.9%,8.8% and 7.8% population
respectively as per 2011 census. Racial identities are still deeply ingrained in the South African psyche and
culture. In South Africa’s major cities remain largely racially segregated, with “black neighborhoods” and
“white neighborhoods, similarly like the US. Apartheid and its associated policies followed before 1994 have
created a strict racial hierarchy whose effects are felt to this day.

The black majority has gained partial control of the new South Africa; they hold political power and
government, but enterprise and economic power still rests in white hands. Blacks have per capita income
1/6th of their white counterparts. A World Bank report in May 2018 stated that South Africa remains the
most economically unequal country in the world. Poverty levels are highest among black people. Whites
make up the majority of the elite or top 5% of the population. This racial division has led several hate crimes
and racial crimes in the form of farm killings and rioting in white majority areas.
Overall Patterns of racism and systemic racial inequality remain entrenched in South Africa despite the end
of apartheid, with rise in racial crimes and vandalism related to it, in last 5 years.

Restrictive measures to retain power

The Democracy Index rankings of EIU categorized South Africa as a “flawed democracy” with declining trend
over the last 5 years from 7.91 to 7.24. The declining trend is attributed to recent set of events undertaken
by the government to put limits on media independence, especially due to the passing of the Protection of
Information Bill 2012 and the Higher Education and Training Laws Amendment 2012. Both these bills
encroach on the constitutional and civil liberties of South Africa as well its overall democratic quality.

The instances of vigilante mob justice, brutal and abusive police tactics of quelling the crime and democratic
protests. Extrajudicial killings and torture are highlighted by Independent Police Investigative Directorate
(IPID), with over 607 deaths either in police custody in the year 2018-19.
 The introduction of laws like Protection of investment act in 2015 to take away special FDI dispute rights
enjoyed by foreign investors under BITS. Coupled with the 2018 uncompensated state land expropriation
committee has led to the fear of targeting white minority groups and foreign investments, which might
damage the banking system and prompt several international investors to question the security of private
investment in South Africa.

The national prosecuting authority is compromised by political interference as exhibited by slow progress of
corruption cases against officials. By contrast the judiciary, in particular the Constitutional Court, is still seen
as squeaky clean and independent, but several attempts have been made in the past by Zuma regime to
curtail its powers to overturn cabinet and government laws. Overall South Africa is witnessing an increasing
trend of centralization and abuse of power by political establishment despite being a democracy.

Xenophobia, nationalism, corruption

The website of GAN integrity describes South Africa as a country which suffers from widespread corruption,
extensive misuse of state money, acts of bribery, nepotism, and tender fraud within government. Corruption
is not only evident at the government level, but also in allied democratic institutions like police. The recent
scandal which involved former president Jacob Zuma, several high-ranking officials and business tycoons,
highlights the extent of corruption in the government machinery.

Xenophobic mob violence peaked in 2008 and again in 2015, these attacks prompted government to deploy
army in cities like Durban and Johannesburg, to deter further unrest and damage to property. In 2019 a
diplomatic rift with Nigeria led to victimization and violence against Nigerian workers. These systematic
xenophobic attacks against refugees, asylum seekers and migrants are a sign of local resentment against the
success of immigrants in achieving socioeconomic mobility and anti-foreigner rhetoric fuelled by politicians
and due to non-action and failure of criminal justice system. Overall, the high levels xenophobic instances of
2015,2019 and 2020, along with high levels of institutional corruption is a worrying sign for South African
society and its stability.

Social conditions (population density and wealth distribution)

South Africa is one of the most unequal and skewedly distributed countries in terms of income and
consumption. Post-apartheid, the level of inequality has risen in the south African society with its GINI
coefficient, a measure of income inequality rising from 0.61 in 1996 to 0.63 in 2019, which is one of the
highest in the world. The population distribution in South Africa is concentrated along the southern and
south eastern coast, with the eastern half being more densely populated. Rural- Urban and racial disparities
do exist, with widespread issues of access to basic amenities like electricity and water. Evictions are a
common feature. The skewed wealth distribution arises from the institutional failure of land distribution,
with white minority controlling 70% of land. During the Covid-19 crisis widespread reports of looting of
grocery stores and alcohol shops due to food insecurity and loss of livelihood was reported.

High levels of high unemployment in several cities has given rise to Brutal drug gangs which wields extremely
high power in many large townships. In one such city military had to be deployed after a series of drug
related murders in 2019. The situation on gender and inclusion segment is also troubling as South Africa has
one of the world’s highest per capita rates of gender-based violence (GBV) and rape.

We can observe that high societal inequality, rising crimes against women’s and high levels unemployment
has put a lot of stress on the South African society at present. The onset of Covid-19 has already made the
situation much worse leading to several riots, demonstrations, and humanitarian crisis in South Africa.

Strength of radical left

 ANC the largest political party and the ruling party is ideologically leftist but in practice melds pragmatic
support to private sector-led growth and investment with a state-centric approach of development known as
the “Developmental state model”. The tripartite agreement of ANC with Communist party and Congress of
South African Trade Unions allows them to exert power on the labor unions, workers. This agreement acts as
bridge between the ruling ANC and working class. With a Heavily unionized labor and rigid labor laws, such
that in several industries unions have an extremely high power to negotiate wages and working conditions.
Given this, it is vital to note that in South Africa labor regulations are not effectively applied, and it is littered
by illegal strikes marred by acts of violence and intimidation. Labor unrest in mining and government sector
is quite common

Dependence on and/or importance to a hostile major power

South Africa have moved towards democracy in 1994, due to which US and SA have a very cordial Bilateral
relationship. SA is a vital accomplice of the United States, with solid joint effort in the territories of health
and wellbeing, education, environment, and digital technology & economy. Since 2007 Sino-South African
relations have gotten progressively close with expanding exchange, strategy, and political ties. With the
Beijing Declaration of 2010, SA-China relations progressed towards diplomatic status and Chinese
government became a Strategic Partner of South Africa.

China is south Africa’s largest trade partner, but due to sustained slowdown in Chinese economy and also a
drop in world economy there is an indirect threat to South African economy as well. In addition to that, the
escalation of US-China trade war would result in disruption of supply chains and that will include South
Africa’s key vehicle sector. Even more direct danger arises from the US crack down on Chinese telecom giant
Huawei, which is a major tech supplier in SA. Thus, adverse impact on South African economy can be a
collateral damage resulting from the tensions between US and china.

Negative influences of regional political forces

The relations between Zimbabwe and South Africa are cordial after the end of apartheid in SA. But there
have been minor instances of tensions between the two due to Zimbabwe’s internal political problems. Also
Govt. of Zimbabwe played a key role in getting Namibia independence from South Africa. Also, it expressed
its interests vigorously against the apartheid in SA and called for putting economic sanctions against the
South African government.

Apart from that South Africa is a key economic player in the African continent. South Africa was admitted to
South African Development Community (SADC) on Aug 1994 after apartheid was ended which changed its
regional standing dramatically. South Africa’s economic development is linked to what happens on the
continent as a whole. South Africa is looked upon by other African nations for moral and material leadership.
South Africa is observed as a state which is capable to ensure peace keeping in the African Continent. Thus,
South Africa has overall harmonious relations with its neighbors and is scene as one of the leaders for
African continent.

Societal conflict (demonstrations, strikes or street violence)

South Africa has a history of Service delivery Protests i.e. demonstrations, often violent in nature, against
incompetent municipal bodies for their deficiency of public services. Labors in SA has lost an estimated
R266-Mn in wages due to strikes and activities related to these strikes. During the period from 2018 to 2017
work stoppages have reached to their highest record over the past 5 years, according to the Dept. Of
Employment and Labor Strike, SA. During the same time it has reported an increase of 25% strikes in 2018
than the previous year.

Violent Crimes are present in South Africa since forever now. These can occur at any time of the day and are
often violent in nature. Since 2011-12, murder rates in SA have been constantly on rise. The number of
 recorded murders has increased from 15554 to 21022 from 2011 to 2018. Un figures for number of murders
per capita are the 5th largest for South Africa.

Different reasons for high violence, violent & non-violent crimes in SA are: The normalization of violence, 
violence is seen as a necessary and justified way to resolve a conflict, there are high levels of social exclusion,
poverty, inequality, unemployment and marginalization. The criminal justice system of South Africa has been
suffering from many issues, including inefficiency and corruption.

Outbreaks of xenophobic violence has become regular in South Africa. These acts are committed by the
poor, and the reason is a combination of socio-economic issues relating to immigration, lack of economic
opportunity, migration, and the ineffective administration of these.

Instability (non-constitutional changes, assassination, civil war)

With Skewed wealth distribution, prevalence of hostility, separate residential areas in the city etc. for
colored and whites, there still exists a sense of hostility among them. South Africa is like a ticking time bomb
with the minority white population of the country is more firmly in control than it was ever. But the
southward spread of independent black Africa, a day of crisis is not far away. But when the blacks move
closer towards the whites, and when the whites find themselves living right up against an African state, their
situation will be visibly different, and the real crisis will have arrived.

There have also been several political assassinations in South Africa post-apartheid. It was reported in 2013
that there had been greater than 450 political assassinations in the region of KwaZulu-Natal since the ending
of apartheid in 1994. This shows that there is a slight future risk of a instability in South Africa if the
government is not able to control it.

References
1. Economist intelligence unit
2. https://fas.org/sgp/crs/row/R45687.pdf
3. https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/909022/So
uth_Africa_-_background_note_v2.0_-_August_2020.pdf
4. https://www.aa.com.tr/en/africa/racism-tops-list-of-rights-violations-in-south-africa/1334932
5. https://www.bbc.com/news/world-africa-46071479
6. https://soundcloud.com/chinatalkingpoints/south-africas-inexplicable-love-affair-with-china
7. https://country.eiu.com/article.aspx?articleid=168255600&Country=South
%20Africa&topic=Economy#:~:text=The%20main%20indirect%20threat%20is,South%20Africa's%20key
%20vehicle%20sector.
8. https://www.state.gov/u-s-relations-with-south-africa/#:~:text=U.S.%2DSOUTH%20AFRICA%20RELATIONS,%2C
%20environment%2C%20and%20digital%20economy.
9. https://www.nytimes.com/1964/04/12/archives/south-africathe-time-bomb-ticks-the-countrys-white-minority-
seems.html
10. https://foreignpolicy.com/2020/06/10/race-apartheid-united-states-george-floyd-protests/
11. https://www.osac.gov/Content/Report/63e37d80-c040-462d-a868-181c51cf7188
12. https://en.wikipedia.org/wiki/Crime_in_South_Africa#cite_note-fabr-65
13. https://www.bbc.com/news/world-africa-49673944
14. http://www.labour.gov.za/strikes-in-2018-reaches-a-high-in-the-past-five-year-%E2%80%93-department-of-
employment-and-labour#:~:text=%E2%80%8BSouth%20Africa's%20workers%20lost,and%20Labour's%20strike
%20monitoring%20report.
15. https://encyclopedia.1914-1918-
online.net/article/labour_movements_trade_unions_and_strikes_latin_america#:~:text=Labor%20unrest
%20increased%20steadily%20in%201918.&text=In%20many%20other%20countries%20in,took%20place%20in
%20rural%20areas.
16. https://www.thesouthafrican.com/news/sa-service-delivery-protests-more-frequent-and-violent-in-2018/  

ECONOMIC RISK COMPONENTS

ICRG Economic risk metrics
GDP PER HEAD
In current international $, South Africa’s GDP per capita (adjusted with PPP factors) is $12999 in 2019. Economic
growth has decelerated in recent years, the 0.87% compounded annual growth from 2015 is relatively stagnant,
compared to neighboring Botswana and Kenya which have witnessed 4.4% and 7.6% CAGR, respectively. Erratic
weather, electricity shortages and prolonged strikes contribute to contraction in agriculture and mining. Major
growth areas are finance, real estate and business services. Despite low growth, RSA remains one of the largest
economies in the region.

Country GDP per capita, PPP % of Average Score

South Africa 12999.12 126% 3.5
Botswana 18502.82 179% 4
Nigeria 5348.34 52% 2.5
Kenya 4509.32 44% 2
2019 Score: 3.5/5

Future projections:

Year 2020 2021 2022 2023 2024 2025

GDP per head, PPP ($) 13,046 13,221 13,396 13,576 13,767 13,973

As seen from the OECD economic outlook, the modest rise in GPD per head is expected to continue into the
foreseeable future. Due to greater expected growth rates for Botswana and Kenya, it is probable that the future
score on this metric for SA falls to 3/5.

REAL GDP GROWTH

Real GDP growth has slowed down considerably, from 1.2% in 2015 to 0.15% in 2019. Major barriers to economic
growth are skilled labor shortage, weak global growth and commodity price volatility. Smaller economies are
growing at a significantly higher pace. RSA is one of the lowest scorers among RSA, Botswana, Nigeria and Kenya.

2019 Score: 5.5/10

Future projections:

Year 2020 2021 2022 2023 2024 2025

Real GDP growth (%) -7.46% 1.1% 1.8% 1.8% 1.8% 1.8%
While before COVID, GDP growth rates were pegged to be around the 2-3% range in the near future, the impact of
the pandemic has led analysts to revise downward, the projection for 2020 and 2021. The economy is to contract
substantially in 2020, with activity reviving from 2021 and pace of growth picking up slowly after. Based on the above
projections, future score by 2025 might be 7/10.

ANNUAL INFLATION RATE

Inflation rate of South Africa has remained stable at an average of 5.1% from 2015 to 2019. Its value in 2019 was
4.02%. This is well within the South African Reserve Banks’s target range of 3-6%. While Kenya and Botswana do
have lower inflation rates, none of these comparable countries have volatility as low as that of South Africa’s. More
recently, in May 2020, due to the impact of COVID-19, inflation rate was seen at its lowest rate (2.2%) since 2004. In
the near future, inflation rate will be decided by the opposing pressures of rising prices of consumer goods and
services, and falling price of fuel.

2019 Score: 8.5/10

Future projections:

Year 2020 2021 2022 2023 2024 2025

Inflation Rate (%) 2.43 3.16 5.5 5.5 5.5 5.5

Inflation rate will remain well within the Central Bank’s mandate of 3-6%, except for 2020 because of the pandemic.
Future score is expected to be 8.5/10.

BUDGET BALANCE AS A PERCENTAGE OF GDP

South Africa faces a budget deficit of 6.3 percent of its GDP in 2019, compared with 4.2% the previous year. The
revenue side is unlikely to pick up any time soon, due to weak domestic demand. On the expenditure side, spending
pressures are increasing due to COVID, wage indexation above inflation and support to state-owned enterprises.
Eskom, the state-owned utility company is in serious financial difficulty. Due to increase in public debt, interest
payments are also bound to go higher.

2019 Score: 4.5/10

Future projections:
 Year 2020 2021* 2022* 2023 2024 2025
Budget balance (% of GDP) -15 -6.2 -5.7 - - -

Budget deficit projection for 2020/21 has more than doubled to about 15% of GDP. South Africa risks a debt crisis, its
public coffers are in a deleterious state after a decade of economic stagnation and looting under Jacob Zuma. With
credit rating already downgraded, investors will have a limited appetite for South African debt. The virus outbreak
has taken a toll, poor public finances and lack of reforms are hurdles to getting the economy back into shape. Future
score is expected to be 4/10.
*Estimated numbers are pre-COVID projections.

CURRENT ACCOUNT AS A PERCENTAGE OF GDP

A Current Account deficit of 3 percent of the country's Gross Domestic Product was recorded in 2019. This deficit is
expected to remain almost unchanged in the short-term future. This is mainly due to income deficit caused by the
continued profit repatriation by foreign companies. While export revenue is supposed to increase modestly due to
depreciating Rand, it will be offset by weak external demand and low mineral export prices. Portfolio investment and
FDI are necessary to fund the deficit.

2019 Score: 10.5/15

Future projections:

202 202
Year 0 2021 2022 2023 2024 5
Current account deficit (% of
GDP) 3.01 2.51 1.55 1.16 0.78 0.44

OECD outlook for current account deficit as percentage of GDP looks positive. With rising demand for commodities
as economies around the world reopen, it seems like a plausible scenario. Future score is expected to be 11.5/15.

ICRG Financial Risk Metrics

FOREIGN DEBT AS A PERCENTAGE OF GDP

South Africa's External Debt accounted for 52.7 % of the country's Nominal GDP in 2019, compared with the ratio of
46.9 % in the previous year. This is an all-time high in 3 decades. It exposes South Africa’s credit rating to a further
downgrade by credit rating agencies, which will ultimately lead to trouble in the form of capital outflows. Further
accumulation of debt stocks might result in debt overhang, which will affect future investment outlays.

2019 Score: 5/10

Future projections:

External Debt in South Africa decreased to 155624 USD Million in the first quarter of 2020 from 185236 USD Million
in the fourth quarter of 2019. With the IMF loaning USD 4.3 billion to South Africa this year, foreign debt as a
percentage of GDP is bound to increase. The New Development Bank also approved a USD 1 billion loan for South
Africa. According to a document Finance Minister Tito Mboweni presented to the National Economic Development
and Labour Council, debt reaches a peak only by 2028-29. Future score is expected to be 4/10.

FOREIGN DEBT SERVICE AS A PERCENTAGE OF EXPORTS OF GOODS AND SERVICES

Foreign debt service percentage has been rising steadily over the past decade, to reach 21% in 2019. This is due to
the high level of external debt faced by the country. Higher debt obligation requires generating higher export
earnings, or other income. It is a recurrent source of vulnerability to external shocks, for instance, a commodity price
slump. A stable percentage is healthy, but long-term deterioration of debt service can point both towards reduced
interest payments or inability to generate foreign exchange income to meet obligations.

2019 Score: 7.5/10

Future projections:

In the passive scenario, economic growth recovers but remains low, debt spirals upwards and debt-service costs
crowd out public spending on health, education and other policy priorities. Rising debt, and the possibility that
government will be unable to repay it, leads bondholders to require higher returns, pushing up debt-service costs. A
weaker currency, lower confidence and capital flight reduce GDP growth and revenue collection. The cabinet
recognises that this scenario is not a viable option for South Africa. In the active scenario, government stabilises debt
through a combination of reforms that boost economic growth and measures to increase revenue collection and
lower expenditure. This would mean spending cuts and tax rate increments. Future score is expected to be 6/10.

CURRENT ACCOUNT AS A PERCENTAGE OF EXPORTS OF GOODS AND SERVICES

Current account balance was deficit 10% of export of goods and services in 2019. Q4 2019 saw the lowest current
account gap in 10 years, well below market expectations. Trade surplus widened substantially due to a rise in exports
value, while lower volumes weighed down the value of imported goods. There was noticeable improvement in the
income shortfall whereas deficit on services account widened somewhat. In 2019 overall, the country recorded a
narrower deficit than the 12% in 2018.
2019 Score: 11/15

Future projections:

With the reopening of economies around the world, exports value is bound to go higher over the next two years. A
corresponding appreciation in Rand would offset this increase however. In the opposite scenario, exports volume
goes down but the Rand depreciates, keeping exports value stable. Imports are likely to grow back to pre-Covid
levels in two years’ time. Overall, this metric is unlikely to fluctuate wildly in the future. Future score is expected to
be 11/15.

NET INTERNATIONAL LIQUIDITY AS MONTHS OF IMPORT COVER

Central banks across Africa attach a high degree of importance to reserve holdings, because it is monitored closely
by ratings agencies and foreign investors. This is a key indicator to evaluate resilience of emerging economies.
Reserves provide import cover and complement monetary policy to achieve price and financial stability. In 2019,
total reserves equaled 5.45 months of imports.

2019 Score: 3/5

Future projections:

South Africa's Foreign Exchange Reserves equaled 9.2 Months of Import in July 2020, compared with the 10.4 in the
previous month. Maintaining foreign exchange reserves is a top priority for the Central Bank, which is willing to step
in from time to time to make sure the objective is met. Hence it is unlikely that import cover will become
unsustainable in the future. Although, the world average in 2019 was 11.5 months, which South Africa lags by a
margin. Future score is expected to be 3.5/5.

EXCHANGE RATE STABILITY

The Central Bank does not target a level for the exchange rate of the rand, rather its policy is directed towards
gradually building up the official foreign exchange reserves, managing domestic liquidity and meeting foreign
exchange needs. South Africa has highly developed and liquid foreign exchange markets. Aimed at reserve
accumulation, the Bank mainly conducts spot purchases and foreign exchange swaps with low maturities. Thus, a
policy of a flexible/ floating exchange rate is adhered to. As a result, price stability is targeted while the nominal
exchange rate adjusts to balance the external accounts. In 2019, the Rand has appreciated 9.2% with respect to the
USD.

2019 Score: 10/10

Future projections:

Year 2020* 2021* 2022* 2023 2024 2025

22.77
Exchange rate, YOY (%) % 4.72% -33% 0.56% 0.83% 1%

*According to an OECD forecast made in 2018, exchange rate was supposed to be stable at around 1-2% change
YOY, until 2025. But the forecast of exchange rate for 2021 and 2022 has since been revised to include the impact of
COVID for the next two years. We are likely going to see a great degree of instability over our investment horizon.
Future score is expected to be 10/10.

Total score (ICRG Economic metrics, 2019) = 32.5/50

Total score (ICRG Financial metrics, 2019) = 36.5/50

Net score (2019) = 69/100

Total score (ICRG Economic metrics, 2025 estimated) = 34/50

Total score (ICRG Financial metrics, 2025 estimated) = 36.5/50

Net score (2025, estimated) = 70.5/100

REFERENCES

1. Historical data: https://data.worldbank.org/country/ZA

2. Projections: https://stats.oecd.org/, https://www.statista.com/, https://tradingeconomics.com/,
https://knoema.com/egagikg/south-africa-gdp-growth-forecast-2019-2024-and-up-to-2060-data-and-charts
3. https://www.afdb.org/en/countries/southern-africa/south-africa/south-africa-economic-outlook
4. https://www.ft.com/content/8195821a-b2be-45f8-a062-7e7cb6ecfbed
5. http://www.treasury.gov.za/documents/national%20budget/2020S/review/Chapter%204.pdf
6. https://www.bloomberg.com/news/articles/2020-06-20/south-africa-sees-government-debt-at-113-8-of-
gdp-in-2028-29
7. https://theconversation.com/the-imfs-4bn-loan-for-south-africa-the-pros-cons-and-potential-pitfalls-
143553#:~:text=The%20International%20Monetary%20Fund%20(IMF,what%20South%20Africans%20should
%20expect.
8. https://www.fitchratings.com/research/sovereigns/south-africa-unlikely-to-meet-latest-debt-stabilisation-
target-26-06-2020
9. https://knoema.com/sgdhjif/south-africa-inflation-forecast-2019-2024-and-up-to-2060-data-and-charts
10. https://www.bis.org/publ/bppdf/bispap73x.pdf
11. http://www3.ambest.com/ratings/cr/reports/southafrica.pdf
 Legal and Regulatory Risk
Structure of Governance:
The South African legal system is a confluence of the English uncodified common law, Roman-Dutch codified civil law
and the country’s indigenous customary norms. The country is among the newer democratic republics, having
elected Nelson Mandela in its first democratic election in 1994. The Constitution that came into force in 1997 is the
supreme law of the country and has primacy over the parliament (a shift from the pre-apartheid era).

The country has a quasi-federal structure, with the center being the locus of power since central law overlapping
with state law (on the issues where the nine states can differ, e.g. Education) overrules state law.

The parliament has a bi-cameral structure, with the National Assembly which elects the President, having 400 seats.
The ruling party – the African National Congress (ANC) currently holds 57.5% of the house. The party has been
governing with a clear majority since the first election post-apartheid, though it has seen a significant decline from
its 70% majority in 2004. The other house is the National Council of States which has 90 seats.

The country elected President Cyril Ramaphosa in 2019 and the next election is coming up in 2024. The current
government is a tripartite alliance between the ANC, the South African Communist Party (SACP) and the Congress of
South African Trade Unions (COSATU). The major opposition party is the Democratic Alliance (DA). Other parties
include the Economic Freedom Fighters (EFF), the Inkatha Freedom Party (Inkatha or IFP), the United Democratic
Movement (UDM) and the Congress of the People (Cope; formed by former members of the ANC) and VF Plus, which
is a largely Afrikaner party.

Domestic legislation impacting FDI:

1. Corporate Law
The Companies Act, 2008 is the governing legislation is this sector. The Act allows for a foreign form to operate
via incorporation of a new private/ public registered company in South Africa, a partnership or as a foreign entity
itself.

As to the purchase powers it has – the law allows for a foreign firm to purchase movable property, subject only
to the attached import duty and taxation requirements. It can also purchase securities as per the Financial
Markets Act, and in order to repatriate dividends, can avail the non-resident notification mechanism created by
the Act. However, in order to own immoveable property, a firm must incorporate in South Africa with a resident
as a public officer. This might prove to be a hurdle tipping a possible expropriation dispute in favor of the host
country given it would make the firm subject to all domestic restrictions.

2. Labor Law
The governing legislations are the Basic Conditions for Employment Act, 1997 and the Unemployment Insurance
Act, 2001. The domestic law is ILO compliant and the minimum wage is set at R15 for every hour worked –
though there exist exemptions for the same. While there exist provisions to adjust this rate, it has been relatively
stable in recent history. This would provide an incoming investor attractive labor rates and relative assurance of
their stability for long term engagement projects like investing in renewable energy.

3. Taxation Law
The governing legislations here are the Income Tax Act, 1962 anf the South African Revenue Service (SARS) Act,
1997. The corporate tax rate is set at 28% and branches of foreign companies are taxed on source income.
Foreign dividends accorded to South African residents are taxable at a 20% rate (subject to exemptions for both
equity and non-equity shares). One of these exemptions, the Participation Exemption, kicks in when the
shareholder (together with all other companies forming part of the same group of companies) holds at least 10%
of the total equity shares and voting rights in the foreign company.

The country does have a Double Taxation Avoidance (DTA) Agreement with the Kingdom of Norway which can
be availed by the potential investor.
 While the internal taxation norms are standard for foreign and domestic firms, the aforementioned might be
hindrances in finding investors in the host country should an incoming form choose to list itself publicly. The DTA
is an assurance of the tax burden not becoming overly onerous.

4. Competition Law
The governing law is the Competition Act, 1998. However, for an incoming foreign investor, the 2019 amendment to
the Act is what holds most relevance.

The said amendment provided for the President to appoint a committee to block acquisitions by foreign firms and
mergers of indigenous firms into foreign firms. To be blocked, a transaction has to cross the threshold wherein it
might “have an adverse effect on national security interests”.

Further, the Act provides that the President must, when determining what constitutes national security interests for
purposes of this Act, take into account all relevant factors, including the potential impact of a merger transaction –
ranging from national security to economic stability, thus allowing a wide berth of discretion.

Additionally, unlike mergers and acquisitions, there is no review of new businesses established, or joint ventures
formed, by foreigner investors.

While the committee is yet to be appointed, public interest considerations, which are generally embedded in
licenses and state tenders, are increasingly serving as criteria for the approval or rejection of foreign investment in
the country.

The extremely broad scope conferred upon the regulation would provide opportunity to the host government to tip
the scales in its favor in any investment scenario.

Energy Laws
The regulatory framework for this sector consists of the Energy Regulation Act and the National Environment
Management Act (NEMA). The regulatory body is the National Energy Regulatory Authority (NERSA) and the
Integrated Resource Plan (IRP) is among the Parliamentary initiatives charting out quantities of electricity supply to
be added throughout the country.

Some ongoing and upcoming changes in the sector provide windows of opportunity for an incoming investor to the
sector.

The government entity – Eskom – which presently controls most of the country’s power production and distribution,
is in the process of being split up by government intervention. Moreover, the city of Cape Town has also challenged
the requirement as per the Energy law that an Independent Power Purchaser needs to be approved of by the
minister concerned. Independent IPPs would be a driver for growth in renewables as a whole.

Eskom has also procured investment to add significant storage capacity including Intl. Bank for Reconstruction &
Development, African Development Bank, Clean Tech. Fund. This would be another factor contributing to the growth
of renewable capacity.

Laws governing FDI:

South Africa has been pushing to increase its incoming FDI with President Ramaphosa’s call to raise $100 billion in
FDI over five years. Currently, the country has most of its FDI in the mining, petroleum refining, food processing,
information and communications technology and the renewable energy sectors. The country’s troubled energy
sector has also seen Saudi Arabia pledge to invest $10 billion.

The policy decision that changed the structure of FDI law in was the Protection of Investment Act, 2015. Popularly
referred to as the ‘Investment Act’, the Act is intended to replace all the nation’s BITs. While the ones still in use will
continue and not be repealed, the country has pledged to not renew any of these and not enter any new ones.

The Investment Act of 2015

The Act provides for an investor to be accorded treatment equal to a national ‘in like circumstances. This marks a
clear difference compared to most Most Favoured Nation (MFN) treatment clauses found in BITs.
Furthermore, the Act also provides for protection and security of incoming investment by saying that a minimum
level of physical security must be accorded, again subject to the caveat that this must be ‘equivalent to that provided
to a domestic investor’ and subject to ‘availability of resources’.

S.10 of the Act confers upon a foreign investor the right to property, as is enshrined in the South African
constitution. Yet, the constitution allows for expropriation as per ‘agreement between the parties or per court
verdict’. Further the Act also provides that such compensation must be ‘just and equitable’ (a Calvo clause position
under customary international law) in contrast with most modern BITs that say that such compensation must be
‘adequate, prompt and effective’ (per the Hull doctrine). The parliament is also considering a bill to amend its
constitution to allow for expropriation without any compensation altogether.

The Act also makes applicable to a foreign investor the Broad-Based Black Economic Empowerment Act, 2003 or the
B-BBEE. This is a legislation created in wake of the inequity and racial wealth gap left between the black, Asian and
coloured communities and the whites in the wake of the apartheid. It has Code that regulates ownership in
enterprises, classifying the into levels depending on how much representation the have from Africa’s non-white
communities. The firms are evaluated yearly and based o the analysis, are given certificates stating their B-BBEE
levels. Better representation (and thus a higher-level certificate) would result in higher chances of working with
government undertakings and tax rebates. While there exist sector codes, there does not exist one for the
renewables sector.

Thus, there exist several pitfalls compared to a BIT governed investment set up for incoming FDI in South Africa.

Dispute Resolution
The Investment Act requires that all domestic remedies be exhausted before an investor can move to an
international forum. Further, while South Africa is part of the WTO (as is Norway) and thus the WTO dispute
resolution mechanism would still remain a resort, the country has not acceded to the jurisdiction of the ICSID.
Further, in the wake of the Investment Act, it seems unlikely that it will do so soon as well.

South Africa has adopted the UNCITRAL model law, allowing that to be applicable should parties wish to arbitrate in
case of an investor- non state actor dispute. However, investor- state disputes will be governed by the Investment
Act, requiring the investor to approach a domestic court for relief, creating a far from level playing field for an
aggrieved foreign investor.

The necessity to approach a domestic court for a dispute with the state could act as a severe disadvantage, especially
with the courts having authority to determine compensation in cases of expropriation.

Kingdom of Norway
Another regulatory factor of note exists in the internal regulations of the investing country itself. The largest
sovereign fund in the world, the Government Pension Fund Global – a result of the country’s oil wealth – is subject
to the decisions of a Council of Ethics. This council can blacklist certain organisations (no matter where in the world
the operate) from getting investment from the fund owing to any human rights violations.

Given South Africa’s history of racial discrimination and several continuing reports of violations, this might be a
hurdle given the sovereign fund is among the country’s largest investors. This could also be compounded by Saudi
Arabia coming in to invest in the same sector in South Africa.

References:
1. Norton Rose Fulbright, Publications – B-BBEE basic principles:
https://www.nortonrosefulbright.com/en-za/knowledge/publications/fe87cd48/broad-based-black-economic-
empowerment--basic-principles
2. South Africa, Corporate & other regulatory issues, PWC:
https://taxsummaries.pwc.com/south-africa/corporate/other-issues
3. Taxation and investment in South Africa, 2017, Deloitte:
https://www2.deloitte.com/content/dam/Deloitte/global/Documents/Tax/dttl-tax-southafricaguide-2017.pdf
4. Investment protection legislation in South Africa, Insights, DLA Piper Global Law Firm:
https://www.dlapiper.com/en/southafrica/insights/publications/2018/11/africa-connected-doing-business-in-
africa/investment-projection-legislation-in-south-africa/#:~:text=Dispute%20resolution&text=Its%20main
%20features%20are%3A,mediator%20to%20resolve%20the%20dispute
5. South Africa- International agreements navigator, UNCTAD Policy hub:
https://investmentpolicy.unctad.org/international-investment-agreements/countries/195/south-africa
6. South Africa Economy, Politics and GDP Growth Summary, The Economist Intelligence Unit:
http://country.eiu.com/South%20Africa
7. South Africa, The Foreign Investment Regulation Review, Edition 7,The Law Reviews:
https://thelawreviews.co.uk/edition/the-foreign-investment-regulation-review-edition-7/1209430/south-africa
8. South Africa, The renewable Energy Law Review , Edition 3 , The Law Reviews:
https://thelawreviews.co.uk/edition/the-renewable-energy-law-review-edition-3/1229909/south-africa
9. Energy 2020, South Africa, Global Legal Insights:
https://www.globallegalinsights.com/practice-areas/energy-laws-and-regulations/south-africa
10. Protection of foreign investments in South Africa, Lexology
https://www.lexology.com/library/detail.aspx?g=f40f8ce0-af37-4778-a89b-a491d600c791
11. South Africa, OECD iLibrary:
https://www.oecd.org/daf/inv/investment-policy/WP-2004_4.pdf
12. Dispute Resolution, South Africa, DLA Piper:
https://www.dlapiper.com/en/southafrica/insights/publications/2018/11/africa-connected-doing-business-in-
africa/investment-projection-legislation-in-south-africa/#:~:text=Dispute%20resolution&text=Its%20main
%20features%20are%3A,mediator%20to%20resolve%20the%20dispute
13. Guide to legal research in Norway, GlobaLex, NYU Law Global:
https://www.nyulawglobal.org/globalex/Norway1.html#_Gateway_to_Law