Foreign investment accelerating at a faster rate than GDP

South Africa’s economic environment is awash with grim news – from disastrous growth of -3.2% in Q1 2019 to an unemployment rate north of 27% – but could there be the initial hint of good news on the horizon?

There is certainly no shortage of tough issues for South Africans to deal with at present. Economic growth has been in its longest declining cycle since 1945 and the question now is whether South Africa is heading for another technical recession.

The consumer continues to reel under the burden of higher administered prices, the value-added tax (Vat) increase and rising fuel costs. At the same time, state-owned enterprises (SOEs), including SAA, the SABC and, most importantly, Eskom – which has just been granted a further R59 billion bailout over the next two years – are putting the country’s fiscus at severe risk.

Coupled with lingering structural issues, we believe South Africa will struggle to achieve growth above 1% this year, and we expect this figure to be closer to the 0.7% level instead.

And while President Cyril Ramaphosa came to power on the promise of a New Dawn for South Africa, by mid-August he will have been in the position for 18 months and we have still seen little by way of implementation that would lead to a reversal of this situation.

His state of the nation address may have been fairly well received, but it reinforced the perception that government is still ‘dreaming’ and needs to move from talking to doing, as Ramaphosa himself admitted. This will serve to restore trust and confidence in the economy and reignite the much-needed and sought after foreign direct investment (FDI) that will help to kickstart the economy.

It is extremely significant and interesting, therefore, that we are seeing a turnaround in FDI, with 2018 seeing the highest FDI numbers achieved in the last five years.

Some R300 billion was pledged during the October 2018 Investment Summit, of which R250 billion is already in implementation.

If this trend continues, it will create the foundation for more sustainable growth in the future.

The Zuma years were marked by a sustained slump in FDI as elements such as Marikana, policy uncertainty and state capture took their toll on external investors.

After bottoming in 2015, FDI struggled to pick up significantly – but 2018 saw the rebound kick in.

The importance lies in the magnitude of the rise in FDI.

After dipping from 2.3% of GDP in 2013 to 0.5% in 2015, it reached 2.2% of GDP in 2018 (showing more than twice the growth in GDP).

Renewed impetus

Accelerating at a faster pace than GDP, FDI is set to give renewed impetus to the SA economy. Such investment is normally a leading indicator, with positive economic growth following some three to five years later.

In fact, the last time we witnessed a spike such as that from last year was in the early 1990s, an era renowned for the end of sanctions, the opening of the SA economy and the peaceful election of our first democratic government.

This paved the way for South Africa to experience a decade of very robust economic growth. If this trend continues, and if government can stay on course with reforms, South Africa should benefit from much better growth in the next few years.

Maarten Ackerman is chief economist and advisory partner at Citadel.

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Foreign investment accelerating at a faster rate than GDP

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