Based on research conducted during the “South Africa 2017 Wealth Report” by the New World Wealth, the top factors that encourage wealth growth in a country include:
- Strong ownership rights.
- Strong economic growth.
- A well-developed banking system and stock market.
- Free and independent media.
- A low level of government intervention.
- Low income tax and company tax rates.
- Ease of investment.
- A low level of trade union involvement.
- Safety & security
South Africa scores below out of 10.
Strong ownership rights
6/10 – This is the most critical component of successful wealth creation globally. Ownership rights are relatively strong in South Africa. However, they are becoming a contentious issue – many feel that white-owned land and businesses should be distributed back to the African majority. Neighboring Zimbabwe offers a case in point as to what happens when ownership rights are stripped – once assets are taken away they tend to lose value as no one is willing to buy anything.
Strong economic growth
4/10 – South Africa scores moderately here, with GDP growth of 0.5% in 2016. Moderate growth of 1.2% forecast for 2017 (source: EIU Viewswire).
A well-developed banking system and stock market
9/10 – South Africa has the most well-developed banking system in Africa and a well-developed stock exchange. This encourages people to invest their money within the country and grow their wealth locally. It also ensures that any economic growth filters through to wealth creation.
Free and independent media
9/10 – South Africa has a well-developed free media. This prevents government from getting away with wrong doing. It also sets South Africa apart from most other African countries.
Low level of government intervention
2/10 – This is arguably the largest problem in South Africa, as the ANC government increasingly tampers with the local business sector.
Low income tax and company tax rates
3/10 – South Africa has high tax rates when compared to other emerging markets in Africa and abroad. This deters business formation and expansion of businesses. Dubai and Singapore are examples of the power that tax rates can have in encouraging business formation – both have very low tax rates.
Ease of investment
5/10 – South African exchange controls are a legacy of the Apartheid government. They make it difficult and complicated for foreign companies to invest in South Africa. They also discourage local companies and individuals from doing business abroad. Perhaps of most concern, they show that the local currency cannot be maintained without interference.
Low level of trade union involvement
3/10 – South Africa’s unions have become increasingly active over the past five years, which has driven up wages and hence pushed up unemployment and inflation. It has also resulted in the closure of several mines and discouraged new business formation. The recent postal and platinum mine strikes lasted almost five months.
Safety & security
4/10 – Safety (especially of woman & children) is a particularly important driver for wealth growth. South Africa features moderately in this regard with problems with rape, hijacking and armed robbery. However, it should be noted that South Africa is considerably safer than most other African countries. Neighboring Nigeria offers a case in point – Nigerian wealth growth over the past few years has been severely hampered by growing religious violence and woman safety concerns.
Major country risks highlighted in the report:
- Rising government debt, which stands at US$161 billion in 2016 (51% of GDP), up from US$76 billion (28% of GDP) in 2006. That’s a US$85 billion increase in 10 years. This rise is mainly due to Eskom borrowing large amounts of money.
- A rising level of government regulation in the local business sector, which makes it unnecessarily complicated to start and run businesses in the country.
- Student protests – most students in SA expect free tertiary education which seems unrealistic considering that only a few countries worldwide have this and the ones that do are very wealthy on a per capita basis (example Sweden).
- Poorly run government parastatals such as Eskom, South African Airways, the Post Office and Telkom (semi-private), which are susceptible to corruption and inefficiency. These corporations are also heavily in debt and a drain on taxpayer funding. Some would even go so far as to describe them as a slush fund for people with government connections.
- Re-distribution of wealth agenda – being pushed by the EFF and by sections of the ANC. These policies could undermine ownership rights.
- A high crime rate. Rape, hijacking and armed robbery are the main problem areas.
- High tax rates, which deter business formation.
- A rising number of strikes and labor action over the past few years, which has impacted heavily on certain parts of economy, most notably the mining and utilities sectors.
- The HIV epidemic – it is estimated that 19% of the adult population is HIV positive (source: Avert.org), which equates to over five million people. This places significant strain on South Africa’s long-term prospects, both from a social and economic point of view.
- The unemployment rate in South Africa, which exceeds 27% (source: trading economics). This is well above the emerging market average and the highest among the top 40 economies worldwide. This is partly due to a relatively high degree of labor market rigidity in South Africa with trade unions having a strong presence in the country.
- The recent drop in platinum prices over the past few years, which places strain on local platinum mines. Platinum mines are one of the top providers of jobs in South Africa so this is a major problem.
- Poorly run municipal services – water, electricity, rubbish collection and sewage. Over-billing has also become a problem over the past year as municipalities seek to get out of debt.
- Deteriorating transport infrastructure and increased traffic congestion – traffic lights are often broken or skew (at wrong angle). Traffic officers also tend to focus on small issues that are easy to check (such as expired license disks), whilst ignoring more serious violations (that are likely to cause accidents).