EXPLORING INVESTMENT OPPORTUNITIES IN SOUTH AFRICA

A BRIEF ABOUT SOUTH AFRICA South Africa is the southern most state in Africa, surrounded by Mozambique, Zimbabwe, Namibia, Botswana and Swaziland 2nd largest African country in terms of GDP per capita after Nigeria. Upper middle income economy and a newly industrialized country. According to GCI is ranked 49th in 2015, moved up from 56th in 2014 South Africa is an efficiency driven economy Higher education and training Goods market efficiency Labor market efficiency Financial market development Technological Readiness Market Size. Unemployment, high Gini coefficient , HIV AIDS and low power infrastructure is one of the major problem faced by South Africa.

POLITICAL SCENARIO POLITICAL Since the end of apartheid in the 1990s the African National Congress (ANC) has dominated South Africa's politics. Jacob Zuma is the current president of South Africa. Controversies regarding corruption in arm deals and using public money as a loan for personal interest have created some distrust among people. Elections of 2016 have not been in favor of ANC and has been the worst performance of ANC after apartheid. This may be a political transition in the history of South Africa . Till now political scenario of South Africa had been perceived as stable.

ECONOMIC & CULTURAL SCENARIO GDP per capita of $11,300 2nd largest in Africa and 34th in world. Well developed financial, legal, communication and transportation sector. Natural resources dependent economy. Sophistication in business Good domestic market size Decent technological readiness. Inflation 5.8%, GDP growth of 2.5%. Attractive Corporate tax rate of 28% Low on power infrastructure. Poor macro environment Ranks low on gross national savings Government budget balance General government debt. High income disparity Low life expectancy and prone to HIV Aids CULTURAL South Africa is a multiethnic society encompassing a wide variety of cultures, languages, and religions. 5 racial population group Black Africans White Colored Asian Others The constitution recognizes 11 official languages Two of these languages are of European origin: Afrikaans developed from Dutch and serves as the first language of most white and colored South Africans English reflects the legacy of British colonialism, and is commonly used in public and commercial life, though it is fourth-ranked as a spoken first language. Christianity is the religion followed by 79.8% of population, Islam is followed by 1.6% and Hinduism by 1.2%.

2.5% 6% WORLD BANK’S GOVERNANCE INDICATORS South Africa India Voice & Accountability Political Stability Government Effectiveness Regulatory Quality Rule Of Law Control of Corruption South Africa 68.5 43.2 65.4 63.9 54.3 India 61.08 13.59 45.19 34.62 54.33 38.94 2014 Data 2.5% 6% South Africa India

FDI INFLOWS

SOME INDUSTRIES TO LOOK UPON Automobile Food Processing Mining Financial Services Information Technology HealthCare

MOST ATTRACTIVE INDUSTRY South Africa's FINREBS is backed by A sound regulatory and legal framework Is sophisticated Providing a full range of services – commercial, retail and merchant banking, mortgage lending, insurance and investment. South African GDP fell by -1.2 % in 2016 Q1 but FINREBS sector grew by 1.9%. Major contributor in South African GDP (21%). High growth prospects as middle class income level is rising Demographic dividend is high as 60% population lies below 30 years of age. Hence industries like insurance, banking, business services, real estate are meant to prosper. EMERGING MARKET FUND WEIGHTAGE

ENTRY & EXIT BARRIERS ENTRY Sunk cost associated before reaching commercially viable operation. Various costs in terms of acquiring and maintaining branches which is a challenge for entrants in particular.  Costs of acquiring and setting up information systems technology, switching behavior, high capital requirements and access to payments systems as potential constraints. The costs of complying with complex financial laws and regulations that frequently change.  Lack of funding High cost of capital for unknown players. EXIT The cost of laying off staff, and contractual obligations such as the payment of rent. Artificial barriers erected by company itself as a strategic decision to not communicate to the competitors and market that it is leaving the market soon.

MONETARY & FISCAL POLICIES South Africa Monetary Policy Chart Inflation Targeting Framework Target Inflation Rate: 3%-6% Current Inflation: 6.3% Repo Rate is at 5.75% and is expected to remain unchanged Following an expansionary monetary policy but sustenance is not expected. Corporate tax rate at 28% High budget deficit- decreasing trade volumes A deterioration in the growth outlook highlights Structural fiscal weaknesses An unsustainable debt load An excessive share of compensation within expenditure. Govt. may be forced to increase tax rates which will be unattractive for investors. 5-Year South Africa USD CDS

CAPITAL MARKETS The Johannesburg Stock Exchange Limited (JSE) is the only licenced exchange for the listing of equity (and debt) securities in South Africa. JSE ranks 2nd in the world for exchange regulation and 1st for ease of raising debt and equity capital. JSE led African exchanges in IPO transactions and capital raised in the past five years. The JSE has two boards for listing equity securities: The Main Board. The Alternative Exchange (AltX) for small and medium-sized companies. The procedure for a foreign company seeking to inward list equity securities on the JSE is subject to the same requirements as those applicable to a domestic company.  There was a 65% increase in equity capital raised for 2014 and the JSE saw 14% more capital raised as compared to 2013. In 2014, the financial industry accounted for 35% of the total capital raised. In the first six months of 2015, the consumer goods industry accounted for 53% of the total capital raised, with the financials industry contributing 26%.

JSE &NSE PERFORMANCE 5 YEARS JSE/FTSE NIFTY

CURRENCY RISK & DERIVATIVES AVAILABLE Rupee depreciated by 25% Freely traded and not controlled by government. High correlation with commodity prices and hence volatile. No INR to ZAR derivative is available on exchange hence INR/USD and USD/ZAR derivative is to be bought or OTC market. Currency Derivatives available on JSE to hedge ZAR futures ZAR Options Maxi ZAR Futures Cost for 1 yr ZAR future is 7.04%. Benefit from 1 yr INR future is 6%. Rupee appreciated by 25% INR per 1 ZAR 2015 INR borrowed @ 9.75% 100 USD Equivalent 1.49 ZAR Equivalent 22.39 Return of 10.45% 24.73 2016 ZAR USD future 1 yr 1.55 INR equivalent 109.76

Conclusion Currently due to global environment there is volatility and there are uncertainties in the business sector in South Africa. To support the export South Africa will continue to devalue its currency. Government is focusing on power infrastructure and have been successful in bringing co- investment in renewable sector. Government is executing a plan to bring state owned companies from losses to profit so as to reduce burden on fiscals and hence can contribute that amount of money in creating jobs and business opportunities. Primary target for government is to decrease the disparity and have inclusive growth. Geography gives an opportunity for business to expand in its neighboring countries where growth potential is high for e.g. Lesotho ,Mozambique, Botswana etc Decision: South Africa has got a good potential with strong infrastructure in place and business supporting policies but currently, India has a better growth opportunity than South Africa. As the global scenario and domestic political conditions of South Africa becomes stable, invest in a company which has competitive advantage in industries like Financial services, Real estate, automobile and healthcare, as huge opportunities lie in these areas.

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