Treasury Today Country Profiles in association with Citi

Doing business in South Africa

The gateway to the African continent

South Africa has emerged as one of the leading emerging economies today on the back of its strong manufacturing, services and agricultural sectors. The country’s successful transition to democracy in 1994, with the election of Nelson Mandela as president, saw South Africa re-enter the global economy and achieve impressive growth levels. In December 2010, South Africa became an official member of the BRICS nations, the group of major emerging economies such as China and India, in recognition of its economic strength and regional status.

Map of South Africa

Key facts

Geography and society
Population:
49m
Population growth rate:
-0.38%
Official languages:
Afrikaans, English, Ndebele, Northern Sotho, Sotho, Swati, Tsonga, Tswana, Venda, Xhosa, Zulu
Capital city (executive):
Pretoria
Capital city (judicial):
Bloemfontein
Capital city (legislative):
Cape Town
Time zone:
SAST (UTC+2)
Land boundaries:
Botswana 1,840 km, Lesotho 909 km, Mozambique 491 km, Namibia 967 km, Swaziland 430 km, Zimbabwe 225 km
Coastline:
2,798km
Economy
Currency:
South African rand (ZAR)
GDP per capita:
$10,700
CPI inflation rate:
4.1%
Member of:
UN, IGTA, FATF
Fiscal year:
1st March – 28th/29th February
Financial capital:
Johannesburg
FX regime:
managed float
History and politics
Government type:
parliamentary republic
Governing party:
African National Congress (ANC)
Republic established:
31st May 1961
President:
Jacob Zuma
Country credit rating
  • BBB+
Trading partners
Top import partners:
China, Germany, US, Saudi Arabia, Japan, Iran, UK
Top export destinations:
China, US, Japan, Germany, UK, India

Today, business operations in the country benefit from a strong economy, a stable democracy and a favourable location for trade. This year, the country ranked 34th out of 183 countries in Doing Business 2011, a report co-published by the World Bank and the International Bank for Reconstruction and Development. The study, which compares business regulation across the globe, highlights South Africa’s principal strengths in investment protection and credit availability for small to medium enterprises (SMEs).

This stable democratic environment has offered investors certainty and a favourable climate for business. The African National Congress (ANC) has won every election since 1994, and has gradually liberalised the economy: inflation levels have stabilised; currency controls have been reduced; and budget deficits trimmed.

Located on the southernmost tip of the African continent, where the South Atlantic meets the Indian Ocean, the country constitutes a logistical hotspot for facilitating trade flows to and from the sub-Saharan region as well as facilitating trade routes to India and south-east Asia. In 2009, China became the top destination for South African exports and its leading source of imports, highlighting the growing importance of Chinese investment on the African continent. Indeed, South Africa accounts for one third of sub-Saharan African GDP and constitutes Africa’s largest capital market; its equity market is among the 20 largest in the world in terms of market capitalisation.

The country’s GDP, despite suffering during the financial crisis, has made a sturdy recovery on the back of a strong resurgence in consumer spending. In 2010, the economy registered a 2.8% growth in real GDP. This increase can be partly attributed to the country’s successful hosting of the 2010 FIFA World Cup, which not only showcased South Africa’s economy to the world, but also provided a significant economic stimulus to kick-start aggregate demand.

So far, the country has yet to fully take advantage of the global commodities boom, and rising mineral prices will play a key role in boosting future economic growth, at least in the short to medium term. Real GDP is expected to grow at 3.6% in 2011 and 4.3% in 2012. The South African government hopes to boost these figures by attracting more foreign direct investment to its manufacturing and services industries. This is an achievable goal. Among its fellow BRICS nations, South Africa is ranked second only to China in terms of competitiveness, according to the World Economic Forum’s 2010/2011 Global Competitiveness Index; largely due to its robust securities regulation and the soundness of the South African banking system.

Several challenges remain, however, with high levels of unemployment and social inequality threatening to endanger the gains of economic growth. To combat these challenges the South African government launched in 2009 the Medium Term Strategic Framework, a five year programme aimed at improving the country’s economic and social infrastructure while boosting its education and healthcare services. The plan seeks to transform South Africa’s recent economic success into a sustainable, long-term reality.

The regulatory structure of the financial industry in South Africa is fragmented. Banks deposit-taking activities are regulated by the Banking Supervision Department of the South African Reserve Bank (SARB). Non-banking financial institutions are regulated by the Financial Services Board (FSB), which is independent from – but accountable to – the Department of Finance.

Regulatory overview

  • South Africa’s banking sector is supervised by the SARB, the country’s central bank. The SARB issues licences to banking institutions and monitors their activities under the Banks Act 1990 (Act No. 94 of 1990) and the Mutual Banks Act 1993 (Act No. 124 of 1993).

  • Central bank reporting regulations require that each cross-border transaction carried out by a bank must be individually reported as far as the balance of payments is concerned, on a daily basis. Monthly reporting on the financial position of the bank is expected, as is periodic reporting of overnight foreign currency positions. Corporates are not subject to central bank reporting requirements.

  • Local accounts can be credited through the transfer of funds from abroad. The transaction will however need to be reported to the SARB to comply with exchange control reporting requirements.

  • The FSB regulates non-banking financial services firms in South Africa. The FSB is a wholly independent institution that aims to promote and maintain a sound financial investment environment in South Africa.

  • The King Report institutionalised corporate governance in South Africa in 1994. The King Committee Report was updated (King II) and the Code of Corporate Practices and Conduct came into effect on 1st March 2002. The code highlights seven key areas for good governance: discipline, transparency, independence, accountability, responsibility, fairness and social responsibility and is similar to the UK’s principles-based regulatory regime.

  • South Africa has been harmonising its statements of Generally Accepted Accounting Practice (GAAP) with international standards. In 2004, the authorities announced the IFRS (without amendments) standard was to be adopted. All companies must file an ‘annual return’ with the Companies and Intellectual Properties Commission within 20 business days after the anniversary of their incorporation.

  • IFRS financial statements must be prepared annually.

  • New audit requirements became effective on 1st May 2011 under the Companies Act, which prescribes oversight and auditor review based on classification of a company, although not all companies are required to have their financial statements audited.

  • Companies that do have to have their financial statements audited must have them audited independently.

  • The legal framework of exchange control in South Africa is one of a total prohibition to deal in foreign exchange except with the permission of, and on the conditions set by, the Reserve Bank. The economic policy underlying exchange control is, however, not totally prohibitive, since such an approach would not be conducive to the conduct of normal international trade and payments.

Taxation framework

Companies are subject to income tax, the secondary tax on companies (STC) donations tax, dividends tax – proposed effective date 1st April 2012 – withholding tax on royalties, non-resident entertainers and sportsmen and the purchase of immovable goods and property from non-residents. Other taxes include the skills development levy, turnover tax, value added tax (VAT), transfer duty, securities transaction tax, customs and excise duty.

  • The basic rate of corporation tax levied on South African companies – including those with foreign subsidiaries – is 28%.

  • Branches of foreign companies are subject to an income tax rate of 33%. Small businesses corporations (those that comply with requirements and have gross income of less than ZAR 14m) pay tax at rates between 0% and 28%.

  • Companies that pay net dividends are liable for STC. The tax is 10% on the excess of dividends declared over dividends received. Any excess of dividends received over dividends declared may be carried forward and offset against future dividends declared to arrive at the ‘net amount’ subject to a 10% tax. A new dividends tax is expected to come into force in April 2012.

  • VAT is levied at two rates – a zero rate and a rate of 14%.

  • Securities Transfer Tax is charged on the transfer of all securities, including sharers, at a rate of 0.25% on the transfer or cancellation of equity securities and stamp duty of 0.5% is payable on lease agreements of immovable (real estate) property.

  • South African law imposes both transfer pricing and thin capitalisation rules. Under the transfer pricing rules, where goods or services are supplied or acquired under an international agreement between connected persons (ie group companies), the pricing must be conducted at arm’s length. The thin capitalisation rules apply where a non-resident investor provides financial assistance to a resident connected person or entity, in which the investor is entitled to participate in 25% or more of the company’s equity. The rules are designed to limit the amount of interest paid to the lender by the South African company. The thin capitalisation rules do not apply however if the debt-to-equity ratio exceeds 3:1, or if the financial assistance is granted by a parent company to its branch operating as an external company in South Africa.

  • Withholding taxes are imposed on royalties at a rate of 12%. No withholding tax is levied on dividends. Nor is it levied on payments made to non-residents. A final withholding tax of 15% is charged on gross payments to non-resident entertainers who earn income in the country.

Case study

Dental Information Systems (Denis)

A top-tier South African dental insurance company with global ambitions.

The challenge

South African-based Denis (Dental Information Systems) started in a garage, building IT systems to detect fraudulent dental claims. In 1997, its founders realised that their clinical data management capability was ideal for the day-to-day administration of dental insurance claims.

Today, Denis is the largest dental services provider in Africa. Its business is to receive dental insurance premiums, process claims and pay dentists. Its success has driven turnover from ZAR 16m eight years ago to ZAR 550m today.

But its expansion required the company to take two new steps. Firstly, Denis needed to integrate its bank’s centralised, electronic processing of payments and receipts with an upgrade of its own operating system. Secondly, Denis was looking for a global banking partner to facilitate plans to take its innovative management solutions to a global level.

The solution

Managing Director, David Carolus, says, “We put our banking out to tender, and Citi was miles ahead of the competition in the speed and consistency of its service.”

Citi’s Integrated Payment Services (IPS) provided Denis a host-to-host solution with the scalability to pay out to over 90 countries, meeting current needs and future plans. Furthermore, Citi helped to seamlessly integrate Denis’s new operating system with Citi’s platform. Carolus recalls Citi Dublin’s staff worked over the weekend of a big rugby match, a true testament to its dedication!

Now, as Denis establishes branches in new countries, Citi is collaborating to implement the same payments structure and solution in the UK, Australia, Canada and Europe.

The result

As Denis establishes branches in new countries, integration with Citi enables the company to use its existing payments structures and solutions without having to adopt a new platform.

“If you expand into a foreign country, it can be a big thing, but we have been able to focus on our core business. The time I spend on banking and related issues is very small. I am very comfortable with Citi; the team has helped us significantly with our global outlook,” says Carolus.

Local banking sector

The banking sector comprises a central bank – South African Reserve Bank – a few large, well-capitalised banks/investment institutions, and a number of smaller banks. In the last couple of years, many foreign banks and investment institutions have set up operations in South Africa. Banks in South Africa are regulated principally by the Banks Act 1990. The Banks Act is based upon similar legislation in the United Kingdom, Australia and Canada.

Banks operating in South Africa when left short of liquidity need to borrow from the SARB at a fluctuating repo rate, which in turn allows the central bank to monitor liquidity positions. South Africa operates a single floating exchange rate that is managed by the SARB through intervention in the spot and forward markets, thereby reducing volatility.

Banks in South Africa

  • Locally controlled registered banks: 13.

  • Registered mutual banks: 2.

  • Registered branches of foreign banks: 13.

  • Foreign controlled registered banks: 6.

  • Foreign banks representative offices: 43.

Liquidity and cash management

Integrated and advanced cash management is a well-established concept amongst corporates in South Africa, and as such, there is a wide range of products available. Both single and multi-entity cash concentration structures are permitted and options include; notional pooling, zero balancing, one-way target balancing and two-way target balancing. Although multilateral netting is not permitted under South African exchange control rules, single and multi-entity notional pooling is allowed.

Aside from the liquidity and cash management structures, South Africa has an advanced money market, and the main short-term investment instruments are:

  • Bankers’ acceptances.

  • Treasury bills – these are issued by the SARB and normally have a maturity of 91 days, although there are some smaller issues with maturities of 182, 273 or 364 days.

  • Debentures – again, issued by the SARB, debentures typically have a maturity of 28 or 56 days, though occasionally they are issued with a 91-day maturity.

  • Short-dated government stock.

  • Negotiable certificates of deposit – issued by major South African banks on a yield basis, with a maximum maturity of five years.

  • Investor promissory notes – these are generally issued with a minimum maturity of two years.

Payments, clearing and settlement

Two main clearing systems exist for the settlement of South African Rand (ZAR) electronic transfers initiated by South African resident legal entities. Non-resident entities are only permitted to use SAMOS payments.

The major payment methods in use in South Africa include: cash, electronic funds transfers, funds transfers via SWIFT, cheques, credit/debit cards, prepaid and contactless cards and mobile e-payments. The main clearing and settlement systems in South Africa are:

  • Bankserv Africa (Automated Payment Clearing House).

  • SAMOS (South African Multiple Option Settlement). The Reserve Bank provides an inter-bank settlement service via the real-time electronic settlement system, for real-time gross settlement of ZAR high-value transactions, the South African Multiple Option Settlement (SAMOS) system.

The SAMOS system facilitates transfers of inter-bank funds and allows banks to monitor their settlement exposures. This improves the overall risk management in the interbank settlement system and enables the Reserve Bank to improve the settlement-risk management and, therefore, reduce the potential for crises.

Besides single settlements between banks, SAMOS is also used for the settlement of obligations arising out of retail payment clearing and the equity and bond markets. SAMOS payments clear via the South African Reserve Bank (SARB). At the end of 2001, the SARB and the Payments Association of South Africa (PASA) introduced certain clearing and settlement limits that were designed to direct payments through the country’s SAMOS system. The limits are:

  • Electronic fund transfers (EFT) debits and debit orders may not be issued through Bankserv for more than ZAR 500,000.

  • EFT credit payments through Bankserv may not exceed ZAR 5m.

  • Cheques may not be written for a sum larger than ZAR 5m.

  • Funds transfers greater than ZAR 5m must be initiated via SAMOS.

Key websites

Government website:
www.gov.za
South African Reserve Bank:
www.reservebank.co.za
The Financial Services Board:
www.fsb.co.za
The Banking Association South Africa:
www.banking.org.za
Department of Trade and Industry:
www.thedti.gov.za
National Treasury:
www.finance.gov.za
South African Revenue Service:
www.sars.gov.za
Johannesburg Securities Exchange:
www.jse.co.za
South African Futures Exchange:
www.safex.co.za
Payments Association of South Africa:
www.pasa.org.za
Association of Corporate Treasurers of Southern Africa:
www.actsa.org.za

Citi’s capabilities in South Africa

Citi is one of the largest commercial banks operating in South Africa today. Citi re-established its presence in South Africa in 1995, and the bank has had a strong presence on the African continent for over 50 years, with offices in 16 countries. An additional 23 countries are covered through a non-presence country unit based in Johannesburg. Including partner banks, Citi’s coverage extends to 1,204 branches in South Africa.

Citi’s Corporate Banking Division is the hub for the bank’s strong relationship with top-tier South African companies and global corporations with business in South Africa. The bank’s extensive product range, which is tailored to provide integrated banking solutions ranging from Global Transaction Services to complex financing structures, is backed up by customer solution teams, comprising dedicated relationship managers and product specialists. These teams are situated both locally and abroad to provide a diversity of expertise.

Global Transaction Services offers integrated treasury and trade solutions for multinational corporations, financial institutions and the public sector in South Africa. Citi Global Transaction Services is instrumental in the development of clearing, settlement and depository facilities in numerous emerging countries, and is a leading strategic advisor on industry issues such as local securities markets, emerging markets, settlement risk, receivables and payment processes, securities infrastructure and technology integration.

Contact details:
Lizelle Pienaar
Director Global Transaction Services Head South Africa
+27 (11) 944-0825
Global Transaction Services, Citi
Andre Gouws
Director Client Solutions Management Head Africa
+27 (11) 944-0770
Global Transaction Services, Citi