Investor confidence is low as citizens and domestic private companies stash their cash abroad to protect it from the volatility of the weakened rand. (Getty)
South Africa is not the investment destination of choice that it has aspired to be, with direct foreign and domestic investments declining while more locals are hedging their savings by putting their money abroad because of deteriorating confidence.
These are among the findings of a new macro review research report released by the Centre for Risk Analysis, which tracks the flows of domestic private sector and government investment in the country from 1994 to 2023, as well as South Africans’ investments abroad.
It says South Africa’s economic growth has been “sub-par for decades tracking at about half the rate of its emerging market peers” and that annual GDP growth of at least 5% is needed over a protracted period to deal with the country’s “dire socio-economic deprivation”.
“This would require an investment level equivalent to some 30% of GDP,” one of the authors, Terence Corrigan, noted in the report.
“World Bank data shows that middle income countries had an average investment rate of around 30% or more for each year since 2007. In South Africa, by contrast, levels of investment as a proportion of GDP only breached 20% in a single year since 1994.”
This was in 2008 during the commodities boom and in the build-up to South Africa hosting the 2010 Fifa World Cup.
“Since 1960, South Africa has never achieved the 30% rate. The past decade has seen an
especially dismal performance. From 2014 to 2021, the trend has been for the quantum of
investment made in each year to fall below that made in the preceding year, with the
singular exception of 2015,” Corrigan noted.
Despite small increases in 2022 and 2023, fixed investment remained below 15% of GDP
in 2023. Total investment in South Africa declined to R685.6 billion from R796 billion in 2013, a drop of more than R100 billion in real terms over a decade.
“Contrary to the allegation of an ‘investment strike’ by private business, the data in this report presents a different picture. The private sector has played its part: every year since the 1990s, the private sector has typically contributed around two-thirds of total fixed investment, while investment by the state has accounted for about a third,” Corrigan noted.
Mining and manufacturing attracted lower levels of total fixed investment than finance, and community and social services. This trend was corroborated by other research by the Centre for Risk Analysis into the structure of the labour market and GDP.
“On all these measures, South Africa’s evolution into a hi-tech, high-skills, post-industrial economy remains well on track even in the current low growth environment. Agriculture, which receives a disproportionate degree of government policy attention, attracted just 5.8% (in 2023) of all fixed investment — a figure on par with its contribution to GDP,” the report noted.
The ratio of direct foreign liabilities (foreign investment in South Africa) to assets (South African investments in other countries) also tells a revealing story. In 2022, foreign direct investment in South Africa was R2.9 trillion; while South African direct investment abroad stood at R3.5 trillion. This translates to a ratio of 0.83 to 1 in 2022.
“It is a significant reversal from 2005 when the ratio peaked at 3.12 to 1. In 2007, the ratio marginally declined to 2.39 to 1 before slumping to 0.53 to 1 in 2020. In part, the slippage in the ratio through the global financial crisis years can be explained by extraneous factors. However, the ratio has remained below 0.90 post-crisis,” Corrigan wrote.
“This is explained by declining foreign investor confidence in South Africa and declining domestic investor confidence, which has seen the rand weaken and domestic firms moving to invest offshore.”
Over the past 28 years most foreign direct investment went into the broader financial services sector (R584 billion in 2022), and into mining and quarrying (R707 billion in 2022) and manufacturing (R1.126 trillion in 2022).
The report noted that the share of foreign investment that is direct has fallen by nine percentage points since 2004 with current levels of non-direct investment leaving South Africa “dangerously exposed to a further deterioration in investor perceptions”.
By contrast South Africans’ direct offshore investments have risen sharply since 2008.
“This is consistent with our anecdotal experience of South African business people seeking external investment targets both to hedge themselves against further political destabilisation in South Africa and to seek out higher growth markets amidst weak domestic growth rates,” the report noted.
“South Africa’s non-direct investment in other countries has also escalated, with relatively high net-worth South Africans looking to hedge themselves against the weakness of the Rand as well as broader threats to their financial well-being.”
Popular offshore investment destinations include the Netherlands, which attracts 20.4% of all South African direct investments, followed by the United Kingdom (18.2%) and the United States (14.8%).
These concerning investment trends are despite South Africa’s improved ranking on PwC’s Private Business Attractiveness Index, which determines relative attractiveness as a location for private businesses to operate and grow, the report noted.
According to PwC, in the Europe, Middle East and Africa region, South Africa is being viewed in a more favourable light as a location for private business. It is ranked 23rd out of 33 countries, an improvement from 2021 and 2022, when the country was ranked 31st and 25th, respectively.
Corrigan said all of this “serves to indicate that South Africa is not the investment destination of choice that it has aspired to be”.
“Threats to property rights and strict affirmative action policies have contributed to the hesitancy of the business sector to invest more into the country. Only through market-friendly policies can South Africa achieve the growth rates it requires,” he added.
