Bloomberg News

Zuma’s Wal-Mart Censure May Deter Investment in South Africa

June 01, 2011

(Updates with government’s comment in seventh paragraph, Massmart shares in eighth.)

June 1 (Bloomberg) -- South Africa’s failed bid to restrict Wal-Mart Stores Inc.’s entry into the country may have damaged the nation’s drive to be an investment gateway into the rest of Africa.

South Africa’s Competition Tribunal ruled yesterday that the world’s biggest retailer can proceed with its 16.5 billion rand ($2.4 billion) purchase of a controlling stake in Johannesburg-based Massmart Holdings Ltd. on condition no jobs are cut for two years. That overruled objections from Trade Minister Rob Davies, who said the deal would have a “destabilizing” impact on the economy as a surge in imports may undermine manufacturing output.

“It illustrates the same interventionist instincts that’s evident within large parts of the government,” said Lars Christensen, head of emerging markets at Danske Bank A/S in Copenhagen. “It’s clumsy behavior. This was a labor protection issue, not a competition issue. It has a damaging effect on foreign investor sentiment.”

President Jacob Zuma, who was swept to power as head of the ruling African National Congress in 2007 with the backing of labor unions, has pushed his government to save jobs as he pledges to slash a 25 percent unemployment rate. At the same time, he is struggling to attract investors, with foreign direct investment slumping by more than a third in 2009.

Job Creation

The government is turning to antitrust authorities to drive its job-creation goals. In April, the Competition Commission recommended to the tribunal that Kansai Paint Co. be allowed to buy Freeworld Coatings Ltd. if the Osaka, Japan-based manufacturer restricted job cuts for three years and built a new plant within five.

South Africa presented research at the Competition Tribunal that showed a 1 percent shift of Massmart’s procurement to imports could result in 4,000 job losses. Massmart will maintain its current import ratio of 15 percent of total goods, Chief Executive Officer Grant Pattison told the Tribunal’s hearings into the transaction last month.

Davies and Economic Development Minister Ebrahim Patel said in a joint statement today that they plan to study the ruling to see whether it meets “public interest tests” and determine whether it prevents “large-scale job losses in supplier industries.”

Massmart Shares

Massmart shares rose 37 cents, or 0.3 percent, to 142.93 rand as of 10:41 a.m. in Johannesburg, giving the retailer a market value of 29 billion rand. The stock has dropped 2.6 percent this year, compared with a 1 percent increase in the benchmark FTSE/JSE Africa All Share Index.

Zuma is under pressure from ANC supporters and union allies to do more to create jobs. The ANC’s support in municipal elections last month slumped to 62 percent from 66 percent in 2009’s national vote. Africa’s biggest economy, which emerged from recession in 2009, shed 14,000 jobs in the first quarter, the national statistics office said on May 3.

The tribunal delayed hearings into the Wal-Mart transaction to allow labor unions and the government to argue their case. The Congress of South African Trade Unions, which represents about 2 million workers, said yesterday it plans to protest the ruling with demonstrations, picketing and strikes.

‘Ducked the Issue’

“They’ve ducked the issue,” the labor federation’s spokesman, Patrick Craven, said in an interview with Johannesburg’s eNews television channel. “They’ve turned a blind eye to the dangers” of job losses.

The tribunal’s conditions on the transaction were the same as those proposed by the two retailers. Wal-Mart and Massmart must try to rehire 503 fired workers, ensure that existing labor agreements are honored for three years and create a 100 million- rand fund to promote production from local suppliers.

“The condition around rehiring already fired workers is especially strict and given the number of job losses in the economy through the crisis will likely reappear in subsequent deals,” Peter Attard Montalto, an economist at Nomura Plc in London, said by e-mail.

South Africa can ill afford to turn away investors. Foreign direct investment into South Africa fell to $5.7 billion in 2009, or 2 percent of gross domestic product, from $9 billion in the previous year, according to data from the United Nations Conference on Trade and Development. That compares with inflows of $12.7 billion in Chile, $26 billion in Brazil and $7.6 billion in Turkey in the same period.

‘Be Careful’

South Africa this year joined BRICS, a political group of emerging-market nations including Brazil, Russia, India and China, to help spur investment in a continent of 1 billion people.

The acquisition of Massmart is Bentonville, Arkansas-based Wal-Mart’s second-biggest after the $11 billion takeover of U.K. retailer Asda Group Plc in 1999. Pattison said on May 9 that Massmart, which operates 300 stores in 14 African countries, plans to expand trading space by 20 percent over the next three years.

“This says to potential investors: be careful about the attitude of the South African government,” Tony Twine, an economist at Johannesburg’s Econometrix, an economics consultancy, said in an interview. “What you read today may not be the same as what you hear tomorrow.”

--Editors: Vernon Wessels, Antony Sguazzin, Karl Maier.

To contact the reporter on this story: Sikonathi Mantshantsha in Johannesburg at smantshantsh@bloomberg.net; Nasreen Seria in Johannesburg at nseria@bloomberg.net.

To contact the editors responsible for this story: Andrew J. Barden at barden@bloomberg.net; Gavin Serkin at gserkin@bloomberg.net


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