When Webhelp, a French-owned group, sought a destination for an English language call-centre, it first considered locations such as India and the Philippines.
But ultimately it decided on South Africa and has plans to create 1,000 much-needed jobs in a country suffering from 25 per cent unemployment. “South Africa came out head and shoulders above them,” David Turner, Webhelp’s chief executive, says.
A few years ago, the plans, announced on Monday, would have gone largely unnoticed amid much larger investments in sectors from manufacturing to mining.
But these days South Africa is battling to attract new deals as large investments drop amid lacklustre economic growth coupled with a damaged investment image.
Webhelp’s £20m investment, which will be spread over five years, will provide a boost for Pravin Gordhan, finance minister, as he delivers his medium-term budget statement on Wednesday and attempts to show that the economy is on track. His problem is that fraught labour relations and regulatory uncertainty are damaging foreign investor sentiment at a time when Africa is garnering increasing attention from investors.
Foreign direct investment into South Africa dropped by 24 per cent last year, to $4.6bn. Meanwhile, FDI flows into Africa as a whole rose 5 per cent in the same period, according to the United Nations Conference on Trade and Development.
Against this backdrop, Mr Gordhan is expected to revise down his growth estimates for this year and next. In February, he forecast growth of 2.7 per cent for the financial year 2013-2014, but that is expected to fall to about 2 per cent.
“I think we have bottomed out of it. Our 2-plus per cent is still going to be better than anything Europe is going to produce,” Mr Gordhan told the Financial Times, arguing that the economy has come through the worst.
But he also acknowledged there was a need to “reignite growth”, adding: “The only problem for us is we have a huge historical deficit in terms of job creation and social inequities, therefore we require higher levels of growth.”
The road ahead for the economy looks bumpy. In recent weeks, the current account and trade deficits have widened, further exacerbating the need to attract investments similar to that of Webhelp’s. But construction companies, mines and the car industry have been hit by strikes, potentially making foreign investors reluctant to bet on Africa’s largest economy.
The International Monetary Fund, in its annual review of South Africa’s economy, warns that the structural problems, which are holding back growth and job creation, have come to the fore. “The economy has underperformed other emerging markets and commodity exporters, exacerbating South Africa’s already high levels of unemployment and inequality, and contributing to rising social tensions.”
In a blunt warning to Pretoria that the government needs to take action, the IMF says: “The outlook is for continued sluggish growth and elevated current account deficits.” It adds: “The balance of risks is tilted firmly to the downside.”
Analysts are worried the government will struggle to keep the current account deficit – which widened to 6.5 per cent of gross domestic product in the second quarter – in check once the US Federal Reserve begins tapering its asset purchase scheme. The deficit has been partly funded by portfolio inflows, which could be affected by Fed tapering. The rand has already been caught up in the emerging market currency turmoil of recent months, trading at four-year lows to the dollar.
Nazmeera Moola, economist and strategist at Investec Asset Management, said that a priority for the country was “to find a way to sort out its labour relations, which is much easier said than done”. The problems are exacerbated by mistrust between government and business.
“You need to open up that dialogue and you need businesses’ concerns to be taken seriously by the government side and vice versa, because right now there’s feeling among business that their feedback is ignored,” Ms Moola says. “If you manage to resolve that issue, then it will help massively to improve the investment climate,” she adds.
Webhelp’s investment illustrates that the country still has its attractions, and it is endowed with Africa’s most developed infrastructure and financial sector by far. Mr Turner says the call-centre company has not been unnerved by the labour problems. “You get concerns wherever you are in the world and we see South Africa as a country that is growing,” he says.
Yet as South Africa approaches the 20th anniversary of the end of minority white rule, the onus is on the government to improve the investment climate and help foster the growth rates required to tackle the nation’s social pressures.