The ‘hidden’ R280 billion hand driving South Africa’s economy

The business landscape in South Africa is relatively flat, with anaemic GDP growth and persistently high levels of unemployment. But sitting outside the scope of most trackable data, the country’s informal economy is driving growth.

According to Craig Blumenthal, director of business rescue, dispute resolution and insolvency at Fluxmans’s Attorneys, South Africa faces a rollercoaster of a year for business and growth.

Coming off of over 1,550 businesses liquidated in 2024, the prospects for the economy 2025 appear to be unpredictable.

While liquidations in 2024 were the lowest they’ve been in over seven years, Blumenthal told BusinessTech that this may be indicative of a worse operating environment.

This is because liquidations happen for various reasons, including voluntary liquidations for operational and investment reasons.

Blumenthal said that lower voluntary liquidations could point to a stagnant or declining business landscape in certain contexts.

However, the simpler answer for why there were fewer liquidations in 2024 is that there were simply fewer businesses around to liquidate.

Another big factor at play – or rather not at play – in the data is the country’s informal sector, which would not be present in Stats SA’s surveys.

According to Blumenthal, this makes it difficult to track whether there is real growth in businesses in South Africa, because formal liquidations and international companies pulling out cannot be accurately tracked against the growth of the informal economy.

In fact, the legal expert noted that, from his research, the informal economy has grown significantly.

In 2022, the informal economy represented around 25% of the business landscape and contributed around 5% to South Africa’s GDP (approximately R230 billion).

Since then, it has grown to about 30% of the business landscape and 6% of GDP (approximately R280 billion).

Roughly 42% of total employment in South Africa is attributed to the informal sector, Blumenthal said.

Trouble for business in South Africa

While the increase in the contribution of informal business in the country appears to be where real growth is coming from, this may reflect poorly on the formal sector, Blumenthal said.

The formal business sector is not growing much at all.

“Generally speaking, the business landscape has shown to be relatively flat, with the South African Reserve Bank and International Monetary Fund estimating about 1.5% and 1.2%, respectively,” he said.

This also needs to be considered in the context of a large number of foreign business operations withdrawing from South Africa versus new foreign business interests entering the South African market.

Blumenthal said that South Africa faces a number of challenges when it comes to attracting international business and investment.

“Some of these considerations are the onerous provisions relating to BBBEE where significant percentages of ownership are required as well as the required spend necessary to maintain a positive BBBEE rating.

“Realistically, a foreign business entering the South African market needs to be willing to forego on average 26% to 30% of its shares depending on the sector,” he said.

In order to do business in South Africa, these businesses also need to allocate a significant portion of their bottom lines to BBBEE spending on skills development, procurement, supplier, and enterprise development. 

This issue in particular has recently come to the fore with Elon Musk’s Starlink not finding satisfactory footing to land in South Africa due to its BEE laws.

As a result, this has drawn criticism from the United States government and US president Donald Trump, who has taken very specific aim at South Africa because of these laws and policies.

Businesses also struggle with finding a formal market to operate in.

In a country with a fairly low population of around 61 million people and rampant poverty and unemployment, this results in a limited percentage of the population having spending power for businesses to trade with, Blumenthal said.

“Statistics show the top 5% of households in South Africa which earn at least R40,000 per month have a combined spending power of 36% of the country’s spending.

“Those falling in the bracket of R40,000 to R75,000 account for 25% of that number, and the top end, which earns over R75,000, accounts for around 14%.

“In essence, although there is great wealth in certain sectors of South Africa, considering the raw data, only 3 to 6 million people have the luxury of spending power,” he said.