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Why South African assets are looking attractive

Foreign direct investment trends in SA.

NOMPU SIZIBA: President Cyril Ramaphosa is out in the UK, selling South Africa as a great investment destination. Remember, he is looking to raise some $100 billion worth of foreign direct investment over a five-year period – and of course that mission started last year, when he took over as president. It seems opportune for us to get a sense of what the investment trends are in the country currently, and whether South Africa has done enough at a policy level to attract more funds. And of course we are on the eve of the Presidential Investment Summit that is set to take place sometime in November.

Well, to discuss the issues further I’m joined on the line by Andrew Bahlmann, the managing director at Deal Leaders Africa. Thanks very much for joining us, Andrew. We’ve had a couple of positive announcements around FDI, like PepsiCo buying up Pioneer Foods, and more recently the Israeli consortium getting the go-ahead to conclude its purchase of dairy producer Clover. But, broadly speaking, what are the trends that you’ve observed in terms of FDI in South Africa? Are there any particular sectors that are currently looking hot? Is the interest steady or declining?

ANDREW BAHLMANN: I think in certain sectors it’s definitely hot. An example there would be ICT, or certainly industrials. I think it all comes down to global competitiveness. We often forget as South Africans that everything is relative. Somebody operating out of Europe is facing their own challenges with the likes of Brexit.

In something where there is scale and growth and the rand cost can be leveraged, there is definitely opportunity – I think in certain asset-heavy industries like construction. And, looking at the trend, imports have slowed down significantly and clearly there isn’t going to be material investment in those types of industries. So, ja, unfortunately one of those is it depends on the industry. But we are still seeing a steady interest from the international markets at an FDI level for some of those industries that I highlighted.

NOMPU SIZIBA: What sort of investors are scouting? Not just South Africa but the continent. Are they institutional, private-equity? What kind of investors, and what are the basic minimum requirements in terms of attractiveness for investment?

ANDREW BAHLMANN: To answer the first part of your question, it’s a mix. There are definitely certain global private-equity funds that are investing heavily in emerging markets, including South and southern Africa. We are also seeing a lot of trade investors, large multinational companies that are looking to grow their own markets and also to diversify their own risks and capitalise on opportunities.

From a foreign investor perspective, the key criterion always is growth. Certainly if you look at sub-Sahara and northern African in particular, there are some really, really exciting markets with almost double-digit growth, which in many parts of the developed world is pretty much unheard of. So that’s a big element.

Governance is clearly a big driver and I think that’s why in South Africa, despite our pessimistic outlook, still has a lot of attractiveness to the robustness of our financial institutional framework.

Then, as I mentioned earlier, if you look at certain industries, the ability for foreign investors to export either skills or products in industries where you’ve got highly qualified people who get paid in rands, and you can export those services in US dollars or euros – as well as at a manufacturing level. In certain industries the Chinese market is not as aggressive and competitive at a pricing level as it used to be, and one has to take logistics into account. Often we are well placed to service global markets.

NOMPU SIZIBA: Presumably South African assets, whatever they may be, should look quite attractive from a valuation perspective. We’ve had several years of sub-par growth and of course the lack of confidence that’s gone with it. Surely that should make South African assets attractive right now?

ANDREW BAHLMANN: They definitely are. We often deal with business owners where to where a conversion is only X euros or X dollars. I think what has to be piggy-backed off that is what are the revenue streams denominated in? That target could be attractive if it’s generating rand; and then one has to compare like with like. Obviously, if you’ve got a South African company that has some export capabilities, that’s hugely attractive.

To answer your question, there is definitely good value in the marketplace; it’s definitely a buyers’ market currently.

NOMPU SIZIBA: As I mentioned, President Cyril Ramaphosa is out in the UK today [Monday, October 14 ]. He is continuing with his campaign to drum up foreign investment. Of course, he was pumping up the African continental free-trade agreement and the broad benefits that will be drawn from it. And, specifically on South Africa, he was talking about how modern our economy is, that we have great institutions – of course admitting that we are still dealing with cleaning up the corruption of the past. But of course talking about institutions like the judiciary and so on. But, from your interactions with outside investors, how will they have taken on that speech, and what detail would they really be looking to see, to be interested?

ANDREW BAHLMANN: Everything that was mentioned by the president is 100% accepted by the marketplace. I think one almost has to go to a level deeper to look at the specific industries. There are a few elements that, if I look at certain foreign acquirers that we’ve dealt with over the years, there is a green business in one element. I know we’ve improved in the rankings, but I still think a lot of work needs to done from that perspective, and I think a lot more clarity needs to be provided around transformation. It’s really making it an attractive opportunity for foreign investors to come in and almost position us in a way that it isn’t another punitive structure, that  foreign investors are coming in very, very cautiously or not coming in at all and giving us some great investment opportunities. So I think the rhetoric is 100% spot-on. There is a lot of work that has to be done, kind of the rubber-to-road implementation and practicalities, so the cheques we are writing at a high level we can cash at a granular level.

NOMPU SIZIBA: We learnt that the ANC natural executive committee in essence agreed to finance minister Tito Mboweni’s latest economic plan, although areas around labour still remain contentious. How do you think this sort of thing would be calibrated by potential investors, as we always hear people complaining about policy certainty?

ANDREW BAHLMANN: It’s definitely around that. You’ve hit the nail on the head. It’s about direction. Experienced investors – if we look at developing economies around the world – have all got their challenges. I think it’s the ability to put a stake in the ground and moving forward from there. At the end of the day it’s risk versus reward. Foreign investors just want to know what all the risks are, so, if they are going to look at an opportunity, they can basically price the risk. To date I think there have been lots and lots of variables and uncertainties and hopefully these types of interventions by the president and the ANC’s plan to stimulate the economy are all kegs that start getting this big machine working, because so many industries in South Africa are dependent on state investments; we forget how many businesses are reliant on that. We see it in a lot of clients’ numbers. There is so much potential, there are these huge pipelines, but someone has to press the “go” button and to date that hasn’t happened.

NOMPU SIZIBA: I like that – the go button! And what about the Presidential Investment Conference scheduled to happen in November? What are your expectations around that?

ANDREW BAHLMANN: I think a more practical plan is around what the investment frameworks need to look like. But, more importantly, what happens then? I love that whole analogy of “so what?” We are attracting all these potential investors – what are we actually going to do, because for me we’ve had to differentiate between plugging the holes, if you like, and filling the gaps, versus stimulating the momentum of the economy. So I think if we can get certain clarity and then I think, as I mentioned earlier, the alignment of how somebody coming in kind of buys into what the president is selling and now they want to invest. How do they find good targets, how do we find those wise buyers, and how do we help them align their own drivers to what this economy needs – be it employment, be it growth, be it diversification, all of those things? And are we making it as attractive at every level as we can? If you look at a lot of other economies, those economies are very attractive and it’s very easy to do business, and there are a lot of tax breaks or “holidays”, if you like, to encourage people to invest heavily and give them time to dig their heels in and create that momentum.

NOMPU SIZIBA: Andrew, thank you very much for you time and insights.

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Aaah…the feeling was good while it lasted. Eskom has just made sure any foreign investors will head for the hills with their money. How can you attract investment capital if you cannot guarantee a predictable supply of electricity….?

End of comments.

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