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South Africa: Horizon Scanning 2022

Africa Connected: Issue 7

By Johannes Gouws

What is the single biggest legislative change on the horizon in the next 18 months?

Two legislative developments will affect the South African economic landscape in the next 18 months.

The first important change is South Africa's data protection law, known as the Protection of Personal Information Act (POPIA), which was adopted in 2013 but only came into effect on 1 July 2021. POPIA aims to ensure that public and private bodies abide by minimum legal standards when processing personal data in South Africa.

The second, and more important, legislative change that is on the horizon is a proposed amendment to section 25 of the Constitution of South Africa. Section 25 of the constitution protects property rights and sets out the grounds on which property may be expropriated, as well as the compensation that will become payable in the case of expropriation. Because of the need for accelerated land reform in South Africa there has been a lot of political pressure to make it clear that section 25 also allows for expropriation of land without compensation. Many constitutional experts believe that it is already the case, but the ruling ANC (African National Congress) and other political parties want the right to expropriate land without compensation to be included explicitly in the constitution.

What impact, in terms of foreign investment (or doing business), will this legislative change have?

The introduction of POPIA means the protection of personal information will be properly regulated in South Africa, which could attract more foreign investment, particularly when considering how important data protection has become globally. Many investors now insist on strong data protection laws to ensure personal information is adequately safeguarded in the jurisdictions they invest in. POPIA does, however, bring with it significant additional costs for companies, which will increase the compliance burden that South African companies already face.

The amendment of section 25 of the constitution threatens private property rights in South Africa and has the potential to seriously affect foreign investment. If expropriation without compensation is not implemented in a responsible manner, it will dissuade investors from acquiring property in South Africa for fear that any capital invested could be expropriated if politically expedient.

What is the current investment appetite in the region? Do you see this changing in 2022?

Even before COVID-19, the appetite for investment in South Africa was weak. Like in all other countries the pandemic has had a significant impact on the economy, leading to further disinvestment from the country.

The economic forecast is steadily improving and may return to pre-COVID-19 levels sooner than expected. A number of sizeable potential foreign direct investments in the country have recently been identified, which bodes well for the future.

Which sectors have been most affected by COVID-19 and what have businesses in those sectors done to cope with these changes or potentially benefit from new opportunities?

The tourism, hospitality and alcohol industries have probably been the hit hardest by the pandemic. The tourism industry was forced to focus much more on attracting local tourists, which has made it possible for local tourists to visit destinations that are usually only available to international visitors. There will be a continued focus on local tourism going forward, even once international tourists start returning to the country. Restaurants have suffered greatly under the lockdown regulations imposed in South Africa and many have closed or have been forced to change to food delivery services. As a result, food delivery services have grown exponentially over the last two years. The alcohol industry was hit very hard with a number of bans on the transport and sale of alcohol, as well as the introduction of limited trading hours once bans were lifted. Due to the nature of the steps taken by the government against the alcohol industry it could not mitigate against the impact and significant harm has been caused, which in many instances will be irreparable.

Where do you see the key areas of growth or opportunity for businesses operating in your country?

The tourism and hospitality industry, among the hardest hit by the pandemic, should recover strongly once international travel is allowed and tourists have the confidence to start travelling to South Africa again.

In terms of the legal services market, what growth are you seeing on the horizon in the next 18 months?

The introduction of POPIA has led to a significant amount of growth in the legal market and it is expected to continue for the foreseeable future until the legislation has been bedded down.

Record low interest rates have also supported the debt markets, which should continue to remain strong while rates remain low. It is hoped that there will be a significant increase in M&A activity as markets recover and clients seize new opportunities or pursue transactions that may have been postponed due to the pandemic. M&A activity has already increased significantly in other jurisdictions and there is no reason to believe that it won't happen in South Africa, particularly since the country typically trails developments in international legal markets by between 6 and 18 months.

What is the general business mood in-country in the next 18 months?

The business mood in South Africa is cautious but hopeful. Certain factors paint a bleak picture in South Africa, including the record-high unemployment levels (especially amongst the youth) and growing inequality, but the country is slowly recovering from COVID-19 which should result in an economic recovery to at least pre-pandemic levels.

The global and local recovery from COVID-19, high commodity prices and a rebound in the hospitality industry will probably be the most important factors in South Africa's economic recovery. South Africa's relatively low inflation could also benefit the export economy. The low record interest rates and a relatively weak currency have also led to an increase in foreign and local investment, with investors recognizing the opportunities in the South African market.