Despite leading the Southern Africa regional foreign direct investment (FDI) inflow charge, South Africa could now be overtaken by Mauritius as the African hub for mining sector financial structuring deals unless it further improves its financial regulatory and tax-ation competitiveness.
Southern Africa has become attractive for international investors, with the UN Conference on Trade and Development (Unctad) saying international investments into the region had almost doubled to $13 billion (R137bn) in 2013.
South Africa, alongside Mozambique, led this investment flow charge, with South Africa getting just above $8bn in foreign investments.
But after being dislodged by Nigeria as the top economy in Africa this year, it now faces the risk of being pushed off its status, as the centre for mining sector financial deals for Africa, by Mauritius.
Experts say Mauritius has an attractive tax regime and double taxation agreements (DTAs) with 14 other African countries.
The island country, whose economy is non resource-based, has reportedly made strides in setting up its capital city as the finance hub for mining sector financial deal structuring.
This has put it in a strong position to compete for the dominant position that South Africa currently enjoys because of its connectedness to the rest of the continent and because of the size of its economy.
South Africa is a resource-heavy economy in which most of the major international mining companies seeking expansion into the rest of Africa have a presence.
The expected boom in investments focused on Africa, especially southern Africa, is driving regional countries to set up finance engineering centres and companies aimed at offering advisory services to such deals.
“We’ve seen Australian, Chinese and British investors putting structures in place ahead of commitments into the resources sector in Zimbabwe, South Africa and Mozambique,” the chief executive of Mauritius-based Imara Trust Company, Preetam Prayag, said on Thursday.
He said that Mauritius enjoyed favourable tax advantages, relatively uncomplicated processes, DTAs and Investment Promotion and Protection Agreements (IPPAs) which gave the country a head start as a favoured jurisdiction for corporate registration.
However, it may prove difficult for Mauritius to dislodge South Africa as the Southern African economic powerhouse “clearly has a sizeable mining industry and remains a major provider of capital for mining projects” across the continent.
“Mauritius is eager to play in this space and its status as an alternative centre could come into greater focus in the years ahead,” said Prayag.
Earlier last week, Statistics Mauritius said that the country’s trade deficit had narrowed by about 8.7 percent to $193.24 million in April compared to the same period last year.
The value of the country’s export sector performance had increased 17.1 percent, largely lifted by increased manufacturing sector sales volumes.
Imports also marginally rose by 4.4 percent, owing to steady increases in machinery and transport equipment costs.
Its major international trade partners included France, India and Britain, it said.
According to experts, Mauritius “has no capital gains tax”, a development they said creates “scope for significant savings”.
They said the island country’s DTA network “limits the rate of any dividend-withholding taxes imposed by African states”.
Its “system of foreign tax credits” can help bring down the tax exposure of well-structured and well-advised companies to as low as 3 percent.
Prayag points out: “DTAs are complemented by Investment Promotion and Protection Agreements with 15 African states.
IPPAs ensure free repatriation of capital and returns along with guarantees of no expropriation and other protections.”
Earlier this month, the London-based Institute of Economics and Peace adjudged Mauritius as the most peaceful country in Africa according to the 2014 Global Peace Index.
Botswana was second in the African rankings although the index said Chad, Burundi and Liberia were faced with a potential worsening of the peaceful climate obtaining in the respective countries.
This is in stark contrast to South Africa, whose economy has been hit by workers’ strikes.
A crippling mineworkers’ strike in the platinum sector only ended last week but the biggest grouping representing skilled workers, the National Union of Metalworkers of SA (Numsa), last week gave notice of a strike action starting on Tuesday to push for wage rises.
The workers’ strikes in South Africa have cast a shadow over the country’s economy whose growth and attractiveness for investments has now taken a knock.
If Numsa proceeds with the strike South Africa risks further economic contraction as the job actions will cut production output in key sectors.
Volatility in the South African economy, which saw it contract to 1 percent during the first quarter of 2014 from the previous quarter’s 2.4 percent, is likely to result in international companies shifting their attention to other African nations when deciding where to set up bases for finance structuring.
Other observers say South Africa’s rampant corruption is equally damaging and a clear stance by the government on how it will address this issue – and showing visibly and effectively that it is doing so – will demonstrate, to local and global markets, that South Africa is “open for business” and help retain its status among the top African countries for doing business.