South Africa is one of Africa’s few middle-income economies and has a solid legal and institutional framework. But its economic structure is dualistic ― a hangover of the apartheid era. A well-developed formal sector (based around mining, manufacturing, financial services and agriculture) co-exists with a large informal economy in which many are forced to eke out a living. Poverty, unemployment, and crime are serious problems.

South Africa is a regional powerhouse, accounting for a third of Sub-Saharan Africa's GDP. It is also more creditworthy, richer and more congenial for business. Its growth rate lags the regional average, but this partly reflects a higher per capita income.

Risks are low to moderate. The business cycle tracks the world economic cycle and commodity prices. The rand is volatile, but its flexibility does dampen external shocks.

South Africa’s economic performance since the mid 1990s has been quite strong. The economy coped well with the transition to majority rule; a solid institutional framework was a big contributor. After many decades of sovereign financing stresses, including a debt ‘standstill’ in 1985 and reschedulings in 1989 and 1993, South Africa is now an ‘investment grade’ sovereign borrower (BBB+ from S&P and Fitch and A3 from Moody’s).

However, employment has lagged headline GDP growth, with unemployment around 25%. The high unemployment reflects spatial mismatches between jobs and jobseekers, large barriers to entry in some industries, and poor education delivery (all partly due to apartheid). There is also a growing disconnect between wages and productivity. The IMF estimates that compared to South Africa’s trading partners real unit labour costs in the manufacturing sector were 35% higher in mid-2011 than in 2007-08.

To increase economic participation of non-whites ‘Black economic empowerment’ (BEE) rules are in place. BEE sets goals for companies on ownership, employment and skill development. Meeting BEE criteria is not legally binding, but firms that don’t are disadvantaged in government procurement. The government has also struggled to meet BEE targets. The policy has also been criticised by some as benefiting only a narrow group of already privileged black South Africans, and of fostering cronyism, corruption and hindering the creation of new innovative black-owned businesses.

South Africa’s economy has rebounded from its 2009 GFC-induced slump. But the rebound has lagged other emerging markets and employment growth has been lacklustre. Modest growth of 3% pa is forecast in 2012 and 2013 ― not strong enough to make inroads into unemployment.

The external position (and the currency) is vulnerable to a sharp reversal in sentiment in capital markets. However, low public and external debt levels (mostly dominated in rand), a flexible exchange rate, and a healthy stock of FX reserves, reduce the risk of a crisis.

The party ruling South Africa since the end of apartheid, the African National Congress (ANC), was returned in the 2009 election, but with a new leader, Jacob Zuma, and with the loss of the two-thirds legislative majority. The Democratic Alliance increased its share of the vote by 4% to 16½% and won the Western Cape Province. Next elections are due in 2014.

The rise of Jacob Zuma fuelled concerns about the potential for policy change, especially since support from the ANC’s left-wing (the trade unions, the communist party and the youth league) were vital to his ascension. But so far this has not come to pass. While some spokespeople from these groups have called for the nationalisation of the mining industry, land expropriation without compensation, and a cessation of inflation targeting, senior leaders from the ANC have encouraged the perception that these are ‘fringe views’.

Nonetheless, there is a risk of increased populism and rising state intervention in the economy if growth and employment outcomes continue to disappoint. A state mining company ― African Mining Exploration and Finance Company (AEMFC) ― has been set up to help develop ‘strategic’ energy resources. An ANC task force is also studying the benefits/costs of nationalising the mining industry. The ANC’s policy conference in end-2012 will be watched closely for any change in policy direction.

According to the World Bank, South Africa ranks in the second top percentile of countries for ‘government effectiveness’ and ‘voice and accountability’, but just outside this grouping on political stability.

South Africa’s investment climate is congenial. Generally, domestic and foreign investors are treated alike and all industries are open to foreigners. The banking system, infrastructure (outside of power and townships) and legal system are at or close to advanced economy standards. This creates the opportunity to invest in a relatively fast-growing country, in a fast growing region, but with OECD-like investment protection.

However, surveys suggest that crime can be an obstacle and cost to business. The OECD and the IMF have also highlighted a lack of product competition in the domestic economy – a legacy of the country’s international isolation under apartheid — can inhibit market entry. Measures of market concentration are above the OECD average, with many industries having large and dominant incumbent firms.

According to the World Bank, South Africa ranks in the second top quartile of countries for control of corruption, regulatory quality and rule of law. On its ease of doing business gauge, South Africa ranks in the top quartile overall.

Apartheid left major social and economic inequalities that have proved difficult to narrow. South Africa is also struggling with an HIV/AIDS pandemic. Approximately 11% of the population is infected ― 20% of 15-49 year olds. Apart from significant social costs, estimates suggest the pandemic could subtract up to 1%pt from annual GDP growth, due to medical costs and lower productivity.

Per capita income is well above regional and emerging market average. But this higher income level obscures large income inequalities: the bottom 20% of the population earns 3½% of national income.

South Africa is relatively stable compared to the regional average. But a failure to lower income and service inequalities could lead to growing civil unrest. These inequalities have already contributed to a high crime rate.

*All 2010 figures unless specified

**The HDI is composite measure of human development: long & healthy life (life expectancy), education (literacy & education enrolment) and income (GDP per capita)

***Expressed as % of GDP unless specified