South Africa has had a stroke of good luck – but companies are not confident investing here: CEO

 ·28 Mar 2022

In a stroke of good luck, South Africa’s economy is currently benefiting from high global commodity prices – but this is not necessarily being matched by increased investment, says Business Leadership South Africa (BLSA) chief executive Busi Mavuso.

Writing in her weekly open letter, Mavuso noted that while the announcements around South Africa’s investment conference should be welcomed, there is still much that government needs to do to improve the operating environment.

“Right now, we are benefiting from high global commodity prices. This is a stroke of good luck. But investment is not responding – miners and others who are making profits thanks to high prices are not using those profits to expand production. Why not? Because they do not have confidence in the policy environment.

“They are uncertain that future regulatory changes may damage the returns they can earn on that investment. In that context, the rational decision is to rather just give the cash back to their shareholders. That is why you need good policy as well as good economic conditions for investment to happen.”

Mavuso said people need to be confident both that global economic conditions will be positive and that the local business environment will be positive. “Otherwise, they won’t take the risk,” she said.

“I believe the president’s efforts are starting to change this. But we absolutely have to keep up the pressure. We must find areas of reform that will improve the outlook. Mining and logistics are obvious areas.

“It is a travesty that our ports are among the most expensive in the world. Our rail network is also expensive and unreliable. There are lots of ways that this can be fixed, particularly with the government and the private sector working together. Mining continues to be dogged by policy confusion. This has to change.”

Investments below par

Research published by the Bureau for Economic Research (BER) also shows that the numbers from president Cyril Ramaphosa’s investment conference are not as impressive as publically touted.

Since 2018, the South African Investment Conference (SAIC) has become an annual event where domestic and foreign companies pledge, or largely repeat existing plans for, fixed investment in South Africa.

“To provide some perspective on the magnitude of the latest pledges, it is worth considering that even in the badly-impacted pandemic year of 2020, total SA fixed investment amounted to R757 billion in nominal terms,” the BER said in a research note on Monday (28 March).

“Therefore, when president Ramaphosa enthuses about R332 billion worth of pledges that are spread over several years at the latest SAIC, we must realise that, in the bigger scheme of things, this is not that large.”

This is even more so because most of these investments are not new, i.e., they mostly confirm existing capex plans that were not driven by the hosting of the SAIC, the group said.

There is arguably merit in showcasing these investments to demonstrate to other firms contemplating investing in South Africa that many others are ‘taking the plunge’.

“However, the bottom line is that despite the hype surrounding previous investment conferences, the actual growth in new fixed investment has been poor for many years. Indeed, the weakness predates Covid-19, although the pandemic did materially worsen the situation.”

After plunging by about 15% in real terms during 2020, total real fixed investment increased by a paltry 2% in 2021.

This meant that in 2021Q4, the level of total real fixed investment was still almost 10% below the pre-Covid level in 2019 Q4. By comparison, overall real GDP was ‘only’ 1.7% below the pre-COVID level in 2021 Q4.

“Perhaps the best illustration of the multi-year deterioration of fixed investment is the fixed investment ratio (total fixed investment as a % of GDP, both in nominal terms).

“The investment ratio declined to a post-democratic low of just above 13% of GDP in 2021. The often-repeated bottom line is that South Africa needs significantly faster growth in fixed investment (i.e., much more investment than in recent years) to move the needle on both the investment ratio and real GDP growth. Although welcome, the latest SAIC pledges are insufficient to do so.”

Read: This is a bright spot for South Africa in a ‘sea of bad news’: Ramaphosa

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