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PROPOSAL FOR INFORMATION SESSION BETWEEN THE DEPARTMENT OF INTERNATIONAL RELATIONS AND COOPERATION (DIRCO) MISSIONS IN THE GULF REGION AND SOUTH AFRICAN CHAMBERS OF COMMERCE

2021-06-25

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PROPOSAL FOR INFORMATION SESSION BETWEEN THE DEPARTMENT OF INTERNATIONAL RELATIONS AND COOPERATION (DIRCO) MISSIONS IN THE GULF REGION AND SOUTH AFRICAN CHAMBERS OF COMMERCE

 

  1. Scope:

A virtual meeting between the Heads of Mission in the Gulf region and the various Chambers of Commerce from within South Africa, to be convened in July 2021. The proposed date is Wednesday, 21 July 2021, but it is not yet confirmed.

 

  1. Description:

The South African Government has identified the Gulf Region as key to South Africa’s economic reconstruction and recovery plan currently, and in any post-COVID-19 scenarios. The region exhibits a vast potential for trade and investment, due to its elevated income and consequent purchasing power. It is, therefore, an attractive region to target for increased economic activity.

In order for South African Missions in the region to have a clear understanding of the business interests of South African companies, and to share the market analysis done by each Mission, the objective is to have a frank discussion on how our Missions in the Gulf could assist business in South Africa. Similarly, an engagement with the various Chambers of Commerce may assist Missions in identifying new opportunities in their countries of accreditation. The ultimate objective would be to arrange “match-making” sessions between businesses identified by Missions in the region, with counterpart South African businesses in the same sectors.

  1. The Main Stakeholders:

The project will be managed by the Directorate: Gulf States at DIRCO in cooperation with Ms Bernadette Zeiler, Chief Executive Officer of the Johannesburg Chamber of Commerce and Industry, Chambers of Industry from various Metros in South Africa, as well as Heads of Mission in the Gulf Region.

 

  1. Communication Plan:

Continual communication via e-mail, telephonically and text, including regular updates.

The Directorate: Gulf States at DIRCO has prepared briefing notes below on the various countries in the Gulf and South Africa’s economic interaction with them.

 

The Middle East Region: The Gulf States

Introduction:

The Middle East region epitomises emerging change and emerging opportunities. Whilst the region is often viewed through a distorting lens that narrows focus on conflict and political instability, it is a region with tremendous potential and economic opportunity. This is primarily expressed amongst the states of the Gulf Region. This region remains the economic powerhouse and is epitomised amongst the six countries of the Gulf Cooperation Council (GCC) of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates (UAE). All of these states share similar economic and political systems and have solidified this connection within the GCC. They are also South Africa’s primary trade and investment partners in the region. If one consider the new trajectory embraced by the Economic Recovery and Reconstruction Plan, announced by President Ramaphosa, it becomes clear that closer economic ties with the Gulf States is regarded as a priority for South Africa.

Location:

The Middle East and Gulf Region is strategically located both in global context. The region is strategically important for South Africa, as it remains South Africa’s closest non-continental region with close maritime proximity and shared interests in the Indian Ocean Economy. The Gulf region, in particular, covers the majority of the Arabian Peninsula and has maritime borders on important marmite trade routes. This is compounded by its hydrocarbon wealth making the region and the trading routes around it, responsible for the majority of the global energy supplies (particularly in oil and natural gas).

South Africa’s priorities in the Middle East focussed on two principal objectives, namely:

  • Economic:
  • Promoting the export of SA goods & services to identified Middle East countries;
  • Promoting inward investment, tourism & skill transfers, as well as scientific and technology exchanges with countries in the region.

Economic & Strategic importance:

The Gulf region is famously wealthy and has successfully leveraged its oil wealth to advance significant development projects, altering the urban landscape of the region.  In addition, the value of these reserves has given the region access to foreign currency which have established large sovereign wealth funds for many states of the region – the region is home to seven of the twenty largest Sovereign Wealth Funds. This has translated in strong capacity for investment and South Africa has been the recipient of this Foreign Direct Investment from the region, particularly in renewable energy projects and the tourism sector. Consequently, the Gulf region is becoming an important investment partner for South Africa, as reflected in the commitment made by both Saudi Arabia and the United Arab Emirates to invest US $ 10 billion into identified projects in 2018.

Additionally, South Africa continues to trade extensively with the region. Whilst a trade deficit – due to the disproportionate dominance of oil imports – is currently experienced, efforts aimed at increasing export trade into growing sectors in the region have shown positive results. Since, 2014 South Africa has enjoyed accelerated export growth to the UAE, Saudi Arabia, Kuwait, Qatar, Oman, and Iran. This has demonstrated a marked growth in export figures from R 23,4 billion in 2013 to R 40,7 billion in 2020, with the region accounting for 4% of South Africa’s global exports. However, it is also equally important to note the trade balance has depreciated in the same time period, due South Africa diversifying its oil supply base to include African suppliers.

When considering the positive trend toward expanding and strengthening economic linkages with the region, South Africa should focus on areas where it has specialised offerings that would:

  • Expand trade & investment ties;
  • Build a sustainable partnership for development;
  • Developing closer people-to-people ties

 

South Africa’s diplomatic relations with countries of the Gulf Region:

  • South Africa maintains strong political relations with the countries of the Middle East;
  • Between 1994 & 1995, S.A. concluded formal diplomatic ties with most the of the Gulf countries;
  • Represented in 5 out of 8 countries in the region: Saudi Arabia, UAE, Kuwait, Qatar and Iran;
  • Oman, Bahrain and Yemen all non-resident accredited from Riyadh (Saudi Arabia):
  • Consulate Generals: Dubai (UAE) and Jeddah (Saudi Arabia);
  • Strong, regular bilateral interaction with Sound existing bilateral political & economic relations with all the ME countries, active Joint/ Bi-national Commissions, a number of State visits undertaken in the last five years (UAE, Qatar, Oman, KSA, Iran).

Specific Country Interests:

The Kingdom of Saudi Arabia

Saudi Arabia is an oil-based economy that is looking to diversify its economy by encouraging the private sector investment. Currently, Saudi Arabia supplies South Africa with 47% of our oil requirements and the focus of the economic diplomacy efforts have been to leverage this client-based relationship to encourage greater investment, particularly in the energy sector. This has produced real investment in South Africa’s renewable energy sector through a R 15 billion investment in solar energy power generation through the Independent Power Producers Initiative.

Critical focus from South Africa’s Missions in Saudi Arabia (Riyadh and Jeddah) has been to increase economic intelligence on Saudi Arabia to provide greater insight into the real potential of a rapidly diversifying economy. This includes a private sector that is extremely liquid in terms of capital available for Foreign Direct Investment and is focused diversifying its investment base in terms of sectors and locations. This has presented a strategy of targeting specific investors with tangible products available for investment, particularly in the energy sector. The result has been the US $ 10 billion investment commitment made by Saudi Arabia during the recent State visit of President Ramaphosa in July 2018.

The investment was being focused on the construction of new refinery and other energy based investments. Saudi Arabia currently has invested R15 billion in the renewable energy sector, through Akwa Power and its Mega Solar energy project, Redstone. Major investment interest areas for Saudi Arabia include food security, energy infrastructure and renewable technologies and advanced manufacturing.

Saudi Arabia also presents tremendous potential as an export destination in number of sectors, which have shown export growth in recent years and can be expected to continue. The areas of the greatest potential and growth are agricultural and agro-processed products, namely fruits, nuts and vegetables as well as meat and live animals, Saudi Arabia has also a large defence procurement budget and procures a number of advanced manufactured items in niche sectors related to the defence industry.

In addition, Saudi Arabia has an extravagant Development plan that seeks to drive growth in new advanced economic sector, where South Africa has established industries and capabilities that may be export ready. In this regard, consideration should be given to Mining and related engineering sectors, communications investment, medical and pharmaceutical and digital technologies related to the 4IR.

 

Country: The United Arab Emirates (UAE)

The UAE has an open economy with a high per capita income and a sizable annual trade surplus. Successful efforts at economic diversification have reduced the portion of GDP from the oil and gas sector to 30%. The UAE has significant assets in its sovereign investment funds, which the South Africa’s Missions (in Abu Dhabi and Dubai) have identified as targets for investment.  In this regard, the Missions have provided insight into the business culture and potential for investment that will better inform South Africa in proposition the UAE for investment. This would, inherently include the identification of suitable projects for the Joint Investment fund to be established following the UAE’s US $ 10 billion investment commitment made during the State Visit of President Ramaphosa in July 2018.

South Africa remains an investment destination with the UAE and its investment oriented sovereign wealth fund as well as for a diverse number of investors in South Africa in a range of sectors. (See investment profile report attached). It is also equally important to recognise the UAE as cortical trading hub and logistics terminal for access into the region. Dubai serves as the main port into the Gulf as well as an important destination – which is reflected in South Africa’s favourable trade balance and diverse range of export products. 

The South African Missions in the UAE (Abu Dhabi and Dubai) have identified sectors and products that have a significant potential   in terms of current and future access to the UAE market. These related to, inter alia:

  • Consolidation hubs;
  • Contract-farming, co-production, which Spinneys is already doing;
  • Real estate;
  • Infrastructure planning (eg partnering with DP World);
  • Investment related to food security;
  • Aquaponics farming, city farming, irrigation and fertilising;
  • Security and defence;
  • Automotive parts
  • Back office/Call Centre operations;
  • Gas and oil rigg building and maintenance;
  • Ship building and maintenance;
  • Green economy;
  • Software applications; and
  • Film opportunities

 

Country: Qatar

Economic diversification has emerged as a high priority in Qatar. Major investments are planned for the 2022 FIFA World Cup and to achieve Qatar’s National Vision 2030, with these two drivers estimated to be worth billions in government spending. Qatar’s development plans have generated renewed opportunities for South African companies. In 2017 more than 70 South African companies visited Qatar in order to explore the possibility of cooperation in the expansion of the manufacturing capacity and industrial base of Qatar as determined by H.H Sheikh Tamim bin Hamad al Khalifa.

According to the World Bank, Qatar is the world’s fifth-largest gas producer, second-largest gas exporter and largest LNG exporter. The country’s oil and gas revenues have made it one of the wealthiest countries in the world in terms of per-capita income. In October 2020, Qatar Petroleum announced a second gas discovery in South Africa’s Luiperd prospect. It is located adjacent to the Brulpadda prospect which was identified in February 2019, as an important gas condensate discovery. Various development options are currently being evaluated to commercialise these findings. These positive developments will bolster South Africa’s energy mix and develop adequate generational capacity to meet the ever-growing demand for electricity, under both the current low-growth economic environment and including when the economy improves, with the objective of achieving energy security for the country.

In terms of nominal GDP, the country is ranked third in the Gulf Region, just behind Saudi Arabia and the United Arab Emirates (UAE).

 

Opportunities for South Africa:

Qatar’s food security

There is huge opportunity for South African companies to expand cooperation with Qatar in the field of fresh and processed food as well as small manufacturing and agricultural expansion. These efforts will assist Qatar in the recent push towards self-sufficiency emanating from the current air, land and maritime blockade against the country.

Also, South Africa should look into introducing introducing foodstuff to the Qatari food retail sector as well as the culinary tourism possibilities of South Africa to Qatar.

South African assistance in the operation of Qatar’s main port: At the request of the Qatari Minister of Transport, TRANSNET has visited Qatar and held discussions with the Minister in order to find ways to cooperate in the operation of the new Hamad deep water port.  The commissioning of the port was accelerated in order to cope with the economic blockade.  

Energy cooperation: The SASOL investment in Qatar remains the most visible example of South African technical expertise and corporate excellence.  In April 2017, the Qatari Government lifted the 12 year old, self-imposed moratorium on gas production in the North Dome-South Pars Gas Field. Gas production aimed at producing an additional 2 billion cubic feet of gas will start in 5 years.

This opens up the possibility for SASOL to significantly increase its investment in the State of Qatar. SASOL has already completed all feasibility studies pertaining to a possible expansion in anticipation of this decision by Qatar and is ready to make another US $ 5 to 6 billion investment to enlarge their Oryx Gas-to-Liquid plant in Ras Laffan.

Qatar Petroleum (QP) has indicated their interest in the South African Energy mix strategy. QP has responded to the South African DOE’s Gas Utilisation Master Plan falling under the Independent Power Producer Procurement Program by putting together a consortium that includes its highly successful utilities manufacturing company NABRAS POWER and the Japanese investment company Marubeni (amongst others).  It would seem as if this programme is currently being delayed by internal South African processes.

Qatar was a founding member of the Gulf Cooperation Council (GCC) and is a member of the Organization of the Petroleum Exporting Countries (OPEC), the Arab League and the Organization of Islamic Cooperation and therefore crucial to South Africa’s strategic intent of diversifying the country’s energy sources.

Based on the trade statistics, SA’s current exports to Qatar seemed to be very minimal, however there is a potential to exploit the market for these products, this can be achieved by encouraging participation in each other’s exhibitions, exchange of technical visits (site inspection), market research studies, amongst others. The market has been exploited by other nations that have strategic competitive advantages, improved modes of transport, super communication and transport technologies that stimulate expansion of trade opportunities.

Country: The Islamic Republic of Iran

South Africa has a dynamic relationship with the Islamic Republic of Iran, which is underpinned by frequent bilateral interaction through the Joint Commission and high level visits. In this regard, the bilateral mechanisms, under which the majority of bilateral economic interaction occurs, have been regularly formulated and facilitated through wither the Mission in Tehran or the DIRCO in Pretoria. Critical to the consolidation and advancement of bilateral economic relations is the economic intelligence and analysis provided by the Mission in Tehran, such that South Africa has been able to identify potential opportunities in an environment that has not been conducive to positive economic relations, in light of the international sanctions and the anticipated secondary sanctions being implemented by the USA.

Nonetheless, Iran's five-year economic plans have emphasised a gradual move towards a market-oriented economy with political and social concerns as well as international sanctions hampering progress. However, with international sanctions lifted in January 2016, Iran's policy makers became focused on re-engaging with international firms and reviving economic growth. The focus and potential for South Africa has centred around:

  • Agro-processing and food security investment (through export trade and investment promotion into targeted agro-processing sectors including aquaculture)
  • Mineral beneficiation: downstream minerals processing and conversion industries, but also provide a solid base for higher value-added manufacturing investments.
  • Capital/Transport equipment and metals fabrication: SOE procurement opportunities, boat/yacht building, carbon steel mill, machine tools, energy-based opportunities.
  • Advanced manufacturing: Set top boxes, digital televisions, specialty materials, composites, nuclear materials.
  • Green Industries: Solar Energy technologies, electrical car technology, solar water heaters, geyser timers, wind energy.

However, regardless of the focus of activities on potential environments, significant risks remain with regard to Iran. Consequently, the management of the bilateral relationship with Iran and co-ordination within South African government remain essential in protecting the South African economy from any potential consequence. The focus on sanctions will be vital in managing economic relations with Iran to ensure the country is not seen to be engaged in sanctions busting activities, which may encourage closer scrutiny from the USA and thereby prevent possible secondary sanctions from afflicting key sectors of the South African economy.

The Mission in Tehran has also undertaken significant work in identifying possible Investment summit participants, the list of which has been presented to DIRCO and will be reviewed following bilateral discussions regarding the imposition of new secondary sanctions by the USA.

 

Country: Kuwait

Kuwait, a small country often referred to as a rare success story in the Gulf region remains somewhat stable and prosperous in a turbulent region. The country’s living standards are among the highest in the world. Kuwait’s oil industry, like its government, is professional and meritocratic. The rule of law applies and the sectarian conflicts which are threatening other parts of the region appear to be muted or absent.

As one of the top-ten crude oil producers globally, Kuwait has had limited success in diversifying its economy away from oil. Kuwait is currently ranked 96th overall in the World Bank’s Doing Business Index 2018. Kuwait remains a net importer of consumer goods, knowledge and technical expertise.

On the bilateral trade front, South Africa’s exports to Kuwait grew from R1,1 billion in 2018 to R1,2 billion in 2019. During the period 2010 to 2019, exports grew from R450 million in 2010 to R1,2 billion in 2019 from. Imports from Kuwait increased from R34,9 million in 2018 to R140,6 million in 2019. Over the 10-year period South Africa has been a dorminant trade partner with Kuwait. It is also crucial to mention that imports from Kuwait had decreased by 10% to reach R140,6 million in 2019 from R638,7 million in 2010.

Kuwait maintains a positive role as an investor with significant investment through its Sovereign Wealth Fund (SFW) in South Africa’s capital and financial markets. Of note however, is the substantive involvement of inter alia Kuwait’s International Financial Advisors (IFA) and the Al Kharafi Groups in premium real estate and tourism infrastructure development in South Africa.

The IFA Hotels and Resorts investment project amounted to a total of R3,2 billion in 2008. Between January 2003 and December 2019 South Africa received 2 investment projects from Kuwait which created 788 jobs. Both investments landed in KwaZulu-Natal’s hotel and tourism sector. On the other hand, Kapico, a prominent Kuwaiti company with a footprint in the automotive, health care, lifestyle and infrastructural sectors, invested an estimated amount of R100 million in the SA automotive after-market sector, and is reportedly willing to expand their investments further.

The Kuwait Investment Authority (KIA) is the oldest sovereign wealth fund in the world. The KIA plays a stewardship role in investing Kuwait’s surplus oil revenues across local and international asset classes to diversify Kuwait’s economy away from oil and to ensure prosperity of future generations. The KIA holds equity stakes in several prominent private sector companies in Kuwait across sectors such as financial services, telecommunications, building materials and food and beverages, facilitating the Kuwait Government to align the strategic direction of these entities with national interests.

The KIA plays a critical role in driving Kuwait’s national transformation, drawing upon its considerable financial strength and influence as well as access to specialised advisors. In particular, the KIA is recognised for providing the Kuwait Government with flexibility in fast-tracking projects of national significance.

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