South Africa

Growth still undermined by the energy and logistics crisis

In 2023, economic activity was severely penalised by electricity shortages and major logistical difficulties. The underperformance of state-owned rail and port operator Transnet due to equipment shortages and maintenance delays following years of underinvestment (exacerbated by theft), severely disrupted exports of raw materials and fruit, as well as supplies to the manufacturing and retail industries.

In 2024, the economy should recover slightly thanks to improved power generation as a result of government reforms under way (Investment Plan for a Just Energy Transition 2023-2027). The disintegration of Eskom (separation of generation, transmission and distribution) and the opening-up of the energy market to the private sector and to competition, should improve energy supply and provide fresh impetus to public and private investment, particularly in renewable energy sources (mainly solar and wind power). Development finance institutions, notably the World Bank and the African Development Bank, have announced major loans (USD 1 billion and USD 300 million respectively) to support energy security and the transition to a low-carbon economy. In addition, the simultaneous reduction in transport bottlenecks will reinforce this tentative recovery in economic activity. Nonetheless, these initiatives will only prompt a small increase in growth in the short to medium term. In addition, exports will remain under pressure due to lower prices, persistent transport problems and weakened demand from key trading partners, notably China. In addition, other obstacles will continue to weigh on activity, such as very high unemployment (over 30%, and 45% among young people) and inflation which is still above the 4.5% target. The weakness of the rand, due to the worsening terms of trade, investor skittishness over the tense economic climate and uncertainty over the new coalition government's programme, plus a durably strong dollar, will continue to fuel imported inflation. The inflation trajectory will force the South African Central Bank (SARB) to maintain its key interest rate (8.25% since May 2023) at restrictive levels.

Persistent twin deficits

Public accounts will continue to deteriorate in fiscal 2024-2025 due to weak revenues that are restricted by economic conditions, while spending pressures have intensified. Government revenues will continue to suffer from weak mineral export earnings and economic sluggishness. On the expenditure side, the massive public sector wage bill will continue to weigh, with the government forecasting a 4.7% rise in wages for FY 2024-2025. In addition, debt servicing is set to remain high in 2024, at around 17% of budget revenues and 5% of GDP. Household support measures (Social Relief of Distressed Grant) also introduced in 2020 in response to the Covid-19 crisis, have been extended until March 2025, although the cost of extending this aid is estimated by the Treasury at R50 billion a year (around USD 2.6 billion). Last, the government approved a ZAR 254 billion debt relief program for Eskom (USD 13.6 billion, or 3.8% of GDP) out of the ZAR 350 billion guaranteed by the state, to be divided between fiscal years 2023-2024 and 2025-2026. The government further announced a further USD 2.5 billion in aid for Transnet. Consolidated gross public debt, which includes non-financial and financial public companies, will remain high (close to 120% of GDP). Nevertheless, South Africa's debt is essentially domestic (nearly 80%), denominated in rand and has a long maturity, making it less vulnerable to the risks associated with rising interest rates and currency depreciation.

The current account deficit will continue to widen. The trade surplus will shrink, reflecting sluggish exports and a slight upturn in imports driven by a weak but gradual recovery in domestic demand. The services deficit should improve significantly, reflecting lower international transport costs and growth in the tourism sector. The primary income deficit, the main contributor to the current account deficit, will remain high, mainly due to the repatriation of dividends by foreign companies. The secondary income balance will also remain in deficit, due to the outflow of expatriate workers' remittances to neighboring countries in particular. With South Africa's sizeable equity and bond markets, the financing of the current account deficit depends mainly on foreign capital flows, which are likely to remain volatile, particularly for portfolio investments. Nevertheless, the sectoral reforms under way, which are central to the new government's economic agenda, should lead to renewed confidence on the part of portfolio investors. FDI flows would also benefit from improved investor confidence and could gradually increase, mainly towards certain mining projects and renewable energies (solar panels, batteries). Foreign exchange reserves should therefore remain adequate (equivalent to 5.5 months of imports in March 2024).

The ANC no longer governs alone

While the African National Congress (ANC), as heir to the victory over apartheid, remains the dominant political force, its popularity has steadily declined in recent years. Record levels of electricity load shedding at Eskom, poor management of water distribution networks, high levels of corruption and reward appointments illustrate the governance problems facing the country. Poor public service delivery has only served to erode voter confidence, already shaken by a tense social context. In addition to structurally high unemployment, poverty, inequality and crime, the population faces a deteriorating standard of living due to persistent inflation. As a result, the ANC lost its absolute parliamentary majority in the May 2024 general election (40.2% of the vote - 159 seats out of 400 in the National Assembly, compared with 230 obtained in 2019) for the first time since the end of apartheid in 1994. However, President Cyril Ramaphosa secured his re-election by Parliament by forming a coalition government with the Democratic Alliance (center), the Inkatha Freedom Party (right) and the conservative Patriotic Alliance. The markets reacted positively to this result, as they feared an alliance between the ANC and the more radical left-wing parties (EFF, MK) whose economic programs included, in particular, the continuation of nationalisation and land expropriation. This centrist coalition is expected to focus on economic reforms to stimulate growth and improve governance, particularly at local level. However, as with most power-sharing agreements, some instability is to be expected, as the ANC and its new allies will continue to disagree.

On the external front, Pretoria's hosting of the annual African Growth and Opportunity Act (AGOA) forum in November 2023 heralded an improvement in relations with the US. Nevertheless, the risk of fresh tensions will persist due to differences of opinion over the war between Israel and Gaza. South Africa referred the matter to the International Court of Justice in early January 2024, accusing the Hebrew state of "genocide" in the Palestinian enclave. The South African government's neutral stance in the conflict between Russia and Ukraine is also a source of friction with the West. In 2023, Washington accused Pretoria of supplying arms to Moscow, although no proof of transfer was found.

Payment

Electronic Funds Transfers (ETF), including SWIFT payments and international transfers, are used for payments in foreign currencies. Cheques are rarely used, outdated, expensive to process, and vulnerable to fraud. Cheque payments are also subject to a clearing period of 10 working days. The majority of businesses no longer use them. Cash payments do still occur but have the same disadvantages. Letters of credit are issued between banks and serve as a guarantee for payments made to a specified person under specified conditions, including imports and exports. In most cases, irrevocable credits and confirmed irrevocable credits are issued. The terms and conditions can be onerous and should be fully understood before acceptance of these letters. Parties can sometimes secure payment on delivery via bank guarantee. Monies are deposited into a bank account, and the bank in turn issues a guarantee for payment on confirmation of delivery. This type of payment is mainly used in matters pertaining to property transfers.

Debt Collection

Amicable phase

The National Credit Act states that the creditor must try to contact the debtor via a phone call, before issuing a formal letter of demand (outlining the outstanding obligation, and sent via email, registered post, or delivered by hand). Once this is done, the parties attempt to negotiate a settlement over an acceptable period of time. As creditors are not obliged to accept payment in instalments, they can opt to proceed with legal action to secure a full one-time payment. This phase is much less costly than immediately proceeding with legal action. This phase also provides greater insight for preparing for the litigation phase. Depending on the nature and value of the claim involved, it is sometimes possible to skip this phase and proceed immediately to litigation.

Legal proceedings

The administration of justice and application of law in South Africa is carried out by the civil and criminal courts. The ordinary courts are the district and regional magistrates’ courts, the provincial divisions of the High Court and the Supreme Court of Appeal. The Constitutional Court is the highest court for constitutional matters. Specialist courts have been established for various legal sectors, including Labour Courts, the Land Claims Court, Special Income Tax Courts, and the Electoral Court.

Determining whether to proceed in a lower court or in the High Court will depend on the type and value of the claim. Decisions of the lower courts can be passed for review or brought to appeal in the higher courts. Some types of cases can only be heard by the High Court, regardless of the quantum of the claim. As a general rule, a court will exercise jurisdiction on the basis that the defendant is resident or domiciled in the area of the court, or if the cause of action arose in that?area.

Proceedings in the Magistrates and Regional Courts generally involve a trial (action) process. Motion (by way of affidavit) proceedings are limited to certain cases only. The High Court can hold both trial (action) and motion (application) proceedings. In action proceedings, the process commences with a summons and is concluded with a trial stage, where witnesses give testimonies. With application (motion) proceedings, the matter will be determined with reference only to written documents and, as a general rule, no oral evidence is permitted. Evidence is set out in affidavits and cannot be contested by cross-examination. Although motion proceedings were generally quicker and cheaper than actions, applications can now end up costing more than action proceedings. When the court is faced with an application in which it is evident that there is a material dispute of facts between the parties, it will then refer the matter to trial.

The alternative to court proceedings is to refer the dispute or claim to arbitration, although few parties are willing to agree the required costs. Arbitration can be faster than court processes and the costs of proceedings are divided equally between the parties. Disputes or decisions at the arbitration hearing can be reviewed through an application to court. Arbitrations can be made an order of court by application, for the purposes of execution.

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Enforcement of a Legal Decision

The High Court deals extensively with execution against property, whether movable or immovable. The rules of the Court provide for the attachment and sale of property in order to satisfy the judgment made on the debt.

Foreign judgments are enforced in South Africa by way of provisional sentence proceedings. They are not directly enforceable. The courts which pronounced the judgment must have had the necessary jurisdiction required to entertain the case, according to the principles recognised by South African law on the jurisdiction of foreign courts.

Insolvency Proceedings

CREDITOR COMPROMISE PROCEDURE

A compromise can be initiated by a resolution of the board of directors, or by direction of a liquidator. They can propose a compromise to all creditors, or a specific class of, creditors and must notify the Companies and Intellectual Property Commission (CIPC) of the proposal. A receiver is appointed to supervise the process. The proposal must be approved by a majority of at least 75%, in value, of the relevant creditors or proxies present at the meeting. If the proposal is accepted, it can be presented to court for confirmation. Once confirmed, the order must be filed by the company with the CIPC within five?days.

BUSINESS RESCUE

The objective of a business rescue is to allow financially distressed companies to restructure and reorganise, in order to avoid insolvency. A business rescue is initiated by a resolution of the company’s board, adopted by a simple majority. Supervision and control is conducted by a business rescue practitioner, appointed by the company and licensed by the CIPC. The process concludes when either: the court sets aside the resolution or order that initiated the proceedings; the court converts the business rescue into liquidation proceedings; the practitioner files a notice of termination of business rescue proceedings; the business rescue plan is rejected; or the business rescue plan is adopted and a notice of substantial implementation is filed.

LIQUIDATION

Liquidation proceedings for a company begin with either a court order on the request of any persons and on the grounds set out in the Companies Act 2008, a request for voluntary liquidation, or an application to court by the shareholders, the creditors, or the company for liquidation (when the company is insolvent). A liquidator is appointed to wind up the company. The liquidator collects all the assets and claims due to the company, sells them and distributes the proceeds amongst the creditors. It is essential that the creditor lodges its claim with the liquidator, regardless of whether it has a judgment or a court order. Once all the proceeds have been distributed, the liquidator files its final liquidation and distribution accounts and makes any payments set out within it. The liquidator then advises the Master of the High Court that the administration of the estate is complete.

Last updated: July 2024