By Richard Reynolds, Head of Strategic Accounts at trade credit insurer Atradius
South Africa is a well-established market for UK businesses with significant opportunities for trade. It can boast extensive national resources and an established infrastructure, albeit in need of improvement in some areas. Seen as the leading services destination, regional manufacturing hub and most industrialised country in Africa, it is also often the springboard for businesses into Sub Saharan Africa. A diversified economy enables favourable access to global markets while a young talented workforce is hungry for future growth. Meanwhile, special economic zones have been established to give special incentives to investors, which it continues to attract, particularly for those seeking a location to access the rest of the continent.
The UK is South Africa's fifth biggest export market, accounting for 5% of its total exports. Annual UK exports to South Africa totalled £4.2bn with bilateral trade between the UK and the South African Customs Union (SACU) worth £9.7bn. According to the ONS, top goods exported to South Africa from the UK over the last year were cars, beverages, mechanical power generators, medicinal and pharmaceutical products and consumer manufactures. The numbers are substantial, with exports of machinery and mechanical appliances valued at £409m in 2018 and motor vehicles worth £335m, whiletrade of beverages – including whisky – was worth around £136m. In addition, top services imported by South Africa from the UK were transportation, travel, intellectual property, business services and financial services. With a solid history and well-established relationships, there are many success stories of UK businesses trading with South Africa and achieving robust growth, and there is still scope for new market entrants and new opportunities.
However, no overseas market is without its trade challenges and this holds true for South Africa. Improvements are still wanting in South African infrastructure, particularly within energy and transport. Unemployment remains high with two thirds of those unemployed under the age of 35 and there is still considerable division in the country, which is challenged by deep poverty, high crime rate and Broad-Based Black Economic Empowerment (B-BBEE) legislation with affirmative action to right the wrongs of the past. These negative issues combined render current market conditions challenging, as evidenced by South Africa's fall in the Ease of Doing Business Index from 39th in 2013 to 82nd this year.
When trading in any market the biggest risk to a business is always the risk of non-payment, which can manifest in many guises from insolvency and economic decline to policy changes and exchange rate fluctuations. While non-payment can be crippling for a business, late payment can also squeeze a business and affect its ability to trade. This is particularly significant when you consider South African economic growth was weak in 2018 at less than 1% and in Q1 2019, GDP contracted 3.2% quarter on quarter. More positively, confidence indicators are expected to gradually improve in H2 due to the election outcome. That said, GDP growth is forecast at just 0.6% for 2019, rising to 1.6% in 2020, as it will take time for the effects of reform to show. The latest Atradius South Africa country report also highlights a rise in business insolvencies with an increase of 30% year-on-year to March 2019. With a subdued performance in manufacturing and mining alongside a struggling consumer sector, linked to weaker household spending, it is expected insolvencies will increase further.
Any market has the potential to be defined by its risks but the difference between success and failure is how these risks are managed – and therefore reduced – in order to bring financial reward. Risk has always been an inherent part of trade and astute businesses should not let challenges blind them to the opportunities that lie beneath.With this in mind, businesses must ensure they fully understand the wider market as well as the opportunities and manage the risks accordingly. Knowledge has always been the bedrock of sound trade and it has never been more important to obtain comprehensive and real-time information about your customers and the wider market. Trading briefs and insights into the performance and intricacies of the market are essential to mitigate businesses against risks and seize the vital opportunities for growth. Moreover, with the speed of change in the global economy, this information has got to be kept up to date in real time. All of this needs to be done well in advance of any trade relationship being formed.
Ensure you have sufficient resources and that there is enough demand for your product or service. Create an export plan which includes realistic objectives for volume and revenue growth as well as profitability, marketing and logistics. Build up a solid understanding of the legal and regulatory framework in South Africa as well as its business culture. Familiarise yourself with the payment practices of the region as a whole, the wider sector as well as that of individual buyers. And should something go wrong, you'll want to be assured that there are legal safeguards in place so you can get paid with trade credit insurance acting as a buffer should the worst happen; it can also protect you from currency fluctuations as well as political, terrorist and economic risks.
With experts on the ground around the world, Atradius has a unique intelligence into global markets and can provide first-hand, real-time information and advice into the opportunities and risks of doing business not only within the wider South African market but with a specific customer. It's why Atradius is relied upon as a trade partner to businesses, supporting them to mitigate risk and build a strong platform for growth. With uncertainty dominating the global agenda, this type of support is essential in order to thrive whatever the future brings.