Ramaphosa’s investment pledges mean little without economic growth, electricity

Last week private sector investment pledges of almost R310 billion were made at South Africa’s fifth investment conference, but in our powerless economy the questions arises if this really matters?

Economic research group, Oxford Economics Africa, says receiving almost R310 billion in investment pledges can probably be seen as an achievement in a country that faces an electricity shortfall of 6 000 megawatts, but the amount does little to address South Africa’s growth problem, which is structural in nature.

For that there is no quick fix.

President Cyril Ramaphosa embarked on a R1.2 trillion investment drive at the start of his presidency and until now the pledges exceeded the target by almost 26% relative to the goal set in 2018.

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There was once again a great deal of aspirational language during the latest conference and Ramaphosa set a new goal of attracting R2 trillion in investment by 2028.

However, the group says, the economy’s performance over the past five years paints a less rosy picture, with real gross domestic product (GDP) only growing by 0.5% per annum, compared to 1.4% during the preceding five years.

“Over the forthcoming five-year period we forecast the economy to grow by only 1.3% per year. Consequently, South Africa’s unemployment rate increased from 27.1% in 2018 to 32.7% in Q4 2022.

“Indeed, the Covid-19 pandemic had a profoundly negative impact on the economy, but the widespread economic erosion was already visible prior to the 2020 lockdowns,” the group says.

The size of South Africa’s economy is now basically the same as it was before the pandemic. The recovery has been slow and uneven, thwarted by various idiosyncratic factors, with rolling blackouts considered the main impediment to growth.

Annual real total fixed investment

In addition, annual real total fixed investment contracted for six out of the past nine years.

When expressed in per capita terms, real fixed investment is languishing at multi-year lows. The group says the R1.51 trillion of new investment pledges made over the past five years is roughly equal to the R1.5 trillion in new investments needed, as detailed in South Africa’s Just Energy Transition (JET) investment plan, over the next five years to ensure a just energy transition.

Speaking on the sidelines of the investment conference, electricity minister Kgosientsho Ramokgopa, who confidently declared that there are no signs of corruption during his recent tour of the country’s power stations, gave a firm indication that government is unlikely to meet its targets to end load shedding, which is currently at stage six, as set out in the president’s 2022 energy plan.

His recent statements raised the possibility of extending the life of South Africa’s ageing coal-fired electrical power plants, which goes against the commitments implied by the JET partnership announced at COP27, to help South Africa transition away from its reliance on coal to a low-carbon economy over the medium term.

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Ramokgopa stated he would present his proposals for adjusting the targets of the plan to cabinet within the coming weeks.

“This flip-flopping adds to the incoherence demonstrated recently by the termination of South Africa’s national state of disaster, as well as Finance Minister Enoch Godongwana’s decision to withdraw an exemption previously granted to state power utility Eskom from reporting irregular, fruitless and wasteful expenditure,” Oxford Economics Africa says.

“As we stated before, most of these promises of new investment would most probably have happened anyway and announcing them at a conference does not necessarily make it new investments.”

Little evidence that investment pledges create jobs

The group says looking back there is also little evidence that these so-called investment pledges have led to meaningful job creation or bolstered the country’s productive capacity given supply-side constraints.

“Government’s mismanagement of the economy over the years made it harder to do business in the country and touting the successes of past conferences or making more promises does not address the reality that South Africa has for too long moved in the wrong direction.

“Confidence levels are low, with the economy widely expected to hardly grow at all in 2023. Decisive action on the policy front is needed to serve as a driver of growth. State capture has seen the economy’s bottom fall out and widespread inefficiency at government level means that increased private sector involvement is essential,” the group says.

Meanwhile BLSA CEO, Busi Mavuso, congratulated the presidency for the successful investment conference, although she pointed out in her previous newsletter that government was doing a bad PR job with the withdrawal of the Eskom exemption and the state of disaster.

However, she says it is all good and well for the president to set a new target but she wants to suggest to the presidency that it should be complemented by other targets.

“Investment is not a good in and of itself. It is good for what it creates, including economic activity and to enable citizens to live better lives.”

She says investment drives economic growth because it increases the capacity of the economy.

“Put simply, the more roads, ports, railways, factories, energy facilities and other economic infrastructure, the more the economy can produce, generating taxable earnings that can make the country better off. While the investment conference’s R1.5 trillion is impressive, it happened during five years of the weakest economic growth we have seen for decades.”

ALSO READ: Load shedding ‘one of the biggest stumbling blocks for economic growth in SA’

Crumbling electricity infrastructure

One of the main reasons is crumbling infrastructure, most obviously in our electricity system, but also in logistics and local government services like water provision, she says.

“The problem is that much of the investment commitments are effectively replacement investments from companies building their own electricity plants because they can no longer rely on Eskom to produce it. That does not expand the capacity of the economy but merely protects the existing capacity.”

However, she says it is still good as the many new electricity plants now being built will resolve load shedding within the next few years and set the scene for renewed business confidence that will hopefully allow for investment that achieves what we really want, namely economic growth.

“If the R2 trillion target is achieved from investment that expands economic capacity, in the form of new mines, new factories, new call centres, new fibre optic cables, backed by a robust investment programme by the public sector itself in new roads, rail, ports and electricity distribution, that would be a great achievement.”

The Bureau for Economic Research (BER) at Stellenbosch University says despite the usual fanfare of mainly local companies mostly reaffirming previously announced capex plans, the energy situation put a cloud over Ramaphosa’s investment conference.

“If nothing else the event is useful in the sense that it illustrates that notwithstanding the many business constraints in SA, the private sector continues to seek out opportunities to invest in the country.

“However, the level of overall fixed investment remains vastly inadequate to achieve faster rates of real GDP growth. Indeed, although increasing from a paltry 13.1% of GDP in 2021 and reversing several years of decline, the ratio of nominal gross fixed investment to nominal GDP was still only 14.1% in 2022 which remains a far cry from the 30% of GDP target by 2030 set in the National Development Plan.