Big Brother’s House
Will South Africa dominate SADC region?
Windhoek – While many companies in the SADC region struggle to balance the costs of production and a shrinking market for their products, South African firms are gearing up for a huge cash-in on the regional market.
According to the country’s Finance Minister, Pravin Gordhan, “South African companies, including foreign companies based in South Africa, stand to benefit from relaxed cross-border financial regulations and tax requirements.”
In a nutshell, the suggestion – as feared by analysts for years – is that South Africa stands to benefit more than anyone else in SADC from regional integration through easier movement of people, goods and services across borders.
The manufacturing and food production sectors in most SADC countries are barely hanging on, while the mammoth South African economy can absorb shocks and even expand at a time that others are downsizing.
The sheer gravitational pull of South Africa’s economy can be seen starkly in two areas: its dominance of the Southern Africa Customs Union (SACU), and the fact that countries such as Botswana, Lesotho, Swaziland, Zimbabwe, Mozambique, Namibia and Zambia all heavily rely on South Africa’s food production and manufacturing.
South Africa accounts for an estimated 93 percent of SACU’s GDP.
South Africa is SADC’s largest food producer, Africa’s biggest steelmaker (19th in the world), accounting for 60 percent of the continent’s total production, has a massive automotive industry and has a financial services sector bigger and more sophisticated than any other in Africa.
In his 2013 National Budget speech in Parliament, Minister Gordhan said, “Africa now accounts for 18 percent of South Africa's exports”, including nearly a quarter of its manufactured exports, and the Reserve Bank had approved over 1 000 large investments in 36 African countries over the last five years.
According to the International Relations and Security Network, while South Africa “only spends 1.1 percent of its GDP on defence, that figure (US$3.19 billion) is still greater than all the other SADC countries combined (US$3.03b)”.
And there is no reason why South Africa will not stop expanding, enveloping swallowing smaller economies and benefiting most from removal of trade barriers.
The South African government has been relaxing cross-border financial regulations and tax requirements on companies in South Africa, making it easier for banks and other financial institutions to grow outwards.
South African firms have been making inroads in underdeveloped regional markets at a pace that others cannot match.
In October 2012, South Africa's state-run petroleum company, PetroSA signed a pact with the DRC Cohydro Sarl that will see the two state oil companies jointly pursuing oil and gas opportunities in the Congo.
Cement manufacturer Pretoria Portland Cement's (PPC) Zimbabwe subsidiary, Portland Holdings Limited (PHL), will build a new plant to service markets in Zimbabwe and Mozambique.
PPC’s new plant will produce about one million tonnes of cement annually and will work with a grinding facility being constructed in Tete, Mozambique.
PPC is the leading supplier of cement in Southern Africa, with three milling depots in South Africa, Botswana and Zimbabwe with total capacity of eight million tonnes of cement annually.
In the financial services sector, South African banking group FirstRand’s subsidiary, Rand Merchant Bank, has acquired an investment banking licence from the Central Bank of Nigeria.
This is FirstRand's second foray into West Africa. The group is finalising acquisition of the Merchant Bank Ghana for almost R750 million, and, according to Business Day, would be keen to link up its planned retail and investment banking operations in the two countries.
Power utility, Eskom, has long considered investing in generation and transmission projects outside South Africa.
In transport, Botswana Rail recently ordered over 500 salt wagons from South African state firm, Transnet.
According to Public Enterprises Minister Malusi Gigaba, “Transnet's delivery of 100 salt wagons from its manufacturing plant in the Eastern Cape to Botswana Railways forms part of the state company's plan to accelerate sales of heavy equipment to the rest of Africa.”
In his Medium-Term Budget Policy Statement, Minister Gordhan said: “Opportunities in Sub-Saharan Africa had benefited many South Africa mining, manufacturing and retail companies.
“With the continued gloomy outlook in eurozone countries and a slowdown in growth in a number of developing economies, a rapidly growing Sub-Saharan Africa holds clear opportunities for South African businesses.”
The IMF's World Economic Outlook estimates that Africa south of the Sahara will grow by five percent this year and 5.7 percent in 2014. This is in comparison to growth of just 1.3 percent in advanced economies this year.
South Africa's exports to the EU fell 0.9 percent year-on-year in the second quarter of 2012, while exports to the US remained flat; and those to China and India grew by just 1.1 percent and 0.7 percent respectively.
By contrast, exports to SADC countries grew by 2.7 percent.
SADC now represents South Africa's second-largest export market after the EU, and is expected to account for 21 percent of exports this year.
Minister Gordhan projects strong growth in exports of manufactured goods to SADC countries over the next five years. This will make SADC South Africa’s biggest export destination for manufactured goods.
And because of this growth in manufacturing, the labour market is very attractive. Analysts say this will see even more skilled labour finding its way to South Africa, which will further hurt the economies of other SADC countries.
South Africa's membership of BRICS will contribute to further leveraging that country’s economic prospects in the weaker regional economies.
Dr Mills Soko, in “The Political Economy of Regional Integration in Southern Africa”, contends that: “From its inception, SADC was essentially political in character. Its predecessor, SADCC, was established in 1980 with the objective of reducing the economic dependence of the region on (apartheid) South Africa, promoting equitable regional integration, generating resources for implementing national and inter-state policies, and garnering international support for the economic liberation strategy.”
However, the region has dismally failed to wean itself off South Africa. And while apartheid has been dismantled – at least from a political perspective – there should still be motivation within the region by leaders to industrialise and grow their economies and end the over-reliance on South Africa.
Dr Soko says “economic integration within SADC has been marked by severe economic imbalances among the member states, which have been skewed in favour of the dominant South African economy”.
He adds: “For this reason SADC originally pursued a strategy of developmental regionalism based on economic co-operation and integration, rather than the classical model of unfettered market integration.
“However, the strategy of developmental integration has not yielded significant results in the SADC context. Although there has been greater regional integration and co-operation, this has proceeded without reference to the principles of equity, interdependence and mutual benefit that SADC originally sought to promote.
“In Southern Africa the processes of economic globalisation and political regionalisation have occurred simultaneously.
These parallel processes have produced contradictions for the SADC integration process, which need to be resolved if SADC is to avert further regional polarisation and to achieve its goal of balanced and sustainable regional integration.”
According to Dr Soko, regional integration will not succeed unless South Africa “discharges its responsibilities in accordance with its hegemonic status”.
“Whether South Africa can assume a hegemonic regional role will depend on three considerations: first, the extent to which the political elites are able to balance the country’s regional obligations against domestic pressures; second, the manner in which the country deals with the legacy of apartheid South Africa’s historical destabilisation of the region; and third, the degree to which the country’s leadership credentials are accepted by other regional states.”
Dr Soko says Southern Africa’s economy is basically located in South Africa.
“South Africa makes up about 60 percent of SADC’s overall trade and about 70 percent of SADC’s GDP.”
The fact is South Africa is never going to shrink so rapidly that other SADC members catch up economically. If anything, a shrinking South Africa will cripple the region.
What is needed then is a double remedy to ensure South Africa does not become so big that it swallows the rest of the region.
Firstly, other SADC members must start working on growing their economies, investing in viable industrialisation, manufacturing and food production models and infrastructure, and developing their own export markets.
Where this is not entirely possible, countries must start looking at ways in which they can benefit from South Africa’s expansion. This can include negotiating to produce locally for South African firms instead of simply importing finished goods from South Africa.
This will require better negotiating skills and strategies by smaller economic players, and no small measure of commitment to regional development by the South African government and its private sector as well.
• Gift Mukototsi is a financial analyst based in Windhoek. He can be contacted at email@example.com