Jo’burg: Bags of Potential, Needs Help

That’s all true, but that’s not the same as saying it has made the most of that reputation at a regional level. “Is South Africa a true regional hub? Yes and no,” says Charles Robertson, chief economist at Renaissance Capital. “Yes, it is clearly seen as a hub, and the inclusion of South Africa into the BRIC grouping – making BRICS – was China saying that South Africa is a good hub for access into Africa. The ICBC investment into Standard Bank, for $5.5 billion in 2008, is still one of the most significant China has ever done, and it was made because of Standard Bank’s network through sub-Saharan Africa.” Infrastructure and the legal system in South Africa are excellent, he says.

“So why no? Because if you’re going to invest in Nigeria, the best way to play that is not via South African listed companies that have tended to play a small role in Nigeria. 15 years ago South Africans were more likely to fly over the continent of Africa on the way to New York than they were to stop in Sub-Saharan Africa. That has changed – South African companies are paying more attention – but still investors will generally get more direct exposure from investing in Nigerian or Kenyan companies.” He points to the clashes between Nigeria and South Africa in recent years, most recently over the telco MTN but more generally over visa issues, as demonstrating an underlying rivalry between the two; indeed, Nigeria is now Africa’s largest economy, and South Africa might slip to third behind Egypt before too long.

The most natural way for South Africa to be a financial hub for the region is if its companies require it to do so. “There is a lot of potential,” says Dennis Dykes, chief economist at Nedbank. “The most direct way this happens is a lot of South African companies moving north of the borders looking for opportunities, and they are all listed. There is already that participation and raising of capital.

“What perhaps hampers it a little bit is the fact that countries don’t want to be dominated by South Africa. They naturally want their own exchanges and their own local participants.”

Nevertheless, no other exchange in Africa compares to the Johannesburg Stock Exchange or South Africa’s debt markets. The JSE is the 19^th largest stock exchange in the world by market capitalization, and the largest exchange in Africa. The JSE describes itself as “the market of choice for local and international investors looking to gain exposure to the leading capital markets in South Africa and the broader African continent.” It has been something of a pioneer in African terms throughout its history: formed in 1887, a World Federation of Exchanges member since 1963, electronic trading since the 1990s, demutualised and listed on its own exchange in 2005. It has an alternative exchange, AltX, for small and mid-sized listings, launched in 2003; it has another market, Yield X, for interest rate and currency instruments; and it acquired the South African Futures Exchange in 2001 and the Bond Exchange of South Africa in 2009. You can trade in five financial markets in South Africa – equities, bonds, and three forms of derivatives (financial, commodity and interest rate) – and there is just no comparable exchange anywhere else in the continent.

“Generally if you want to raise capital, whether it be bank finance or project finance or equity capital, this is really the only deep market you have available,” says Dykes. “In a lot of African countries, the tradition is mostly to invest in government bonds: you don’t have those deep capital markets which have developed over a number of years.”

Additionally, many of the companies listed on it are themselves multinational and strongly present in numerous African markets, among them British American Tobacco, SABMiller, GlencoreXstrata and BHP Billiton.

One sees regional countries seeing to make use of South Africa’s markets from time to time. In 2012, for example, the Namibian government floated a R850 million 10-year bond, the first tranche of a R3 billion programme. On the equity side, the 2011 change in the listing rules to allow foreign domiciled companies to be treated as domestic listings was clearly intended to attract foreign companies to consider the South African market as a listing venue. Prior to that, foreign companies had been subject to foreign exchange rules, limiting the amount of equities local investors could hold; prior to 2004, foreign companies couldn’t list at all.

If there’s something missing, it’s the sense of the state really pushing South Africa as a financial hub. “I would have thought there was very high potential given our financial markets are broad, deep and there is a lot of experience, with world class market infrastructure and institutions,” says Peter Worthington, senior economist at Barclays. “But I don’t know if the government has really got its head around the idea that this is a desirable thing, to be aggressively promoted.”

That might be a question of priority. “The government is very fixated on manufacturing as the saviour sector, and perhaps other sectors like tourism and financial services aren’t pushed as much as they could be,” Worthington says. “But the government has been proactive in the sense that if you want to invest in Africa, capital controls have been lifted completely. So there is an African agenda at the South African government, and all activity is favoured.”

There are some practical further steps the government could take to bolster the country’s ambitions as a regional hub, bankers say. One is to make it easier for an international workforce to set up there. “If they want South Africa to be a financial and commercial hub for Africa, the government needs to make it easy for companies to operate, for example by a more accommodating attitude to work visas for skilled foreigners,” says Worthington.

Curiously, earlier this year a Chinese property developer, Shanghai Zendai, announced that it planned to develop a chunk of Johannesburg into a financial hub, in what was assumed to be an attempt to centralize China’s trade relations with various African countries. Shanghai Zendai calls it “Africa’s New York”.

There is some sense in this. Chinese trade with Africa hit $201.1 billion in the first 11 months of 2014, according to the Ministry of Commerce of the People’s republic of China (Mofcom)’s2014 Business Review, and total Chinese investment in Africa to date is believed to have topped $40 billion, chiefly around mining and infrastructure. The ICBC/Standard Bank deal is a signal that China wanted financial services capability to go with all that investment, and so building a hub for it is not without merit. Shanghai Zendai has acquired 4,000 acres, paying $100 million to buy it from a South African chemical manufacturer, but does not appear to have done much since.

Johannesburg would argue that it already has a financial hub – the Sandton district, where the stock exchange is housed along with most of the major local and international banks – and that the Chinese might sensibly just hub their operations from there.

Johannesburg itself is unarguably the city that should be seen as a hub. According to the City of Johannesburg itself, it generates 16% of South Africa’s wealth, employs 12% of the national workforce, and 74% of South African companies have their headquarters there. The city’s international airport serves 2.5 million international passengers a year, and its City Deep freight terminal handles 30% of South Africa’s exports. Finally, it hosts South Africa’s highest court, the Constitutional Court.

There’s no doubt that the financial services industry, one of the strongest sectors in South Africa, is central to the country’s health and so represents one of its best prospects for expansion. “It is amazing what share of our corporate income tax receipts, our personal income tax receipts and our VAT tax receipts are generated by the financial sector, and only the financial sector,” Worthington says. “It’s a goose that is laying a fiscal golden egg. The sector should be supported and promoted.”

And the positive view is that it also helps Africa in general, making it easier to fund infrastructure, grow private capital and just do new things. “The deepening of Africa’s financial services is well in train,” says Ballim, “and we [as lenders] are arguably the most significant sweeping force that can change lives on the continent.”