Despite its recent credit ratings downgrades, and political risks, South Africa has climbed back into the 2017 A.T. Kearney Foreign Direct Investment (FDI) Confidence Index.
A.T. Kearney’s index, entitled Glass Half Full, finds that while global business executives are increasingly worried about the negative effects of politics and geopolitics, they are nevertheless more bullish on the global economy and FDI prospects.
Global business executives continue to see an increase in geopolitical tensions as the highest risk in the external environment.
The United States again tops the FDI Confidence Index, holding its first-place position for the fifth year in a row. Germany rises to the second position in the FDI Confidence Index, followed by China in third place. The United Kingdom and Canada round out the top five spots.
“South Africa makes a comeback in the Index, likely as a result of improving short-term economic prospects and the long-term investment potential in the country’s manufacturing sector,” A.T. Kearney’s report said.
“Despite some continued economic volatility due to low global commodity prices, the Middle East and Africa make a comeback on the Index after a two-year absence,” it said.
The United Arab Emirates ranks 21st on the Index, with South Africa rounding out the Index in the 25th spot. “This could signal a desire by global investors to diversify the location of the FDI after several years of a ‘flight to safety’ trend.”
The report said that while overall FDI flows to Africa decreased 5% in 2016 to an estimated $51 billion, South Africa bucked the overall regional trend, with UNCTAD estimating its FDI inflows increased 38% in 2016. “It should come as no surprise, then, that South Africa claims the final spot in the top 25.”
The report said that South Aafrica’s return to the index would seem to suggest that recent FDI trends may continue: FDI inflows rose 38% to an estimated $2.4 billion last year after falling to its lowest level in 10 years the previous year.
According to UNCTAD, the 2015 slump was a result of weak economic growth, low commodity prices, and high electricity costs coupled with divestments from non-core assets in the first quarter of 2016.
The report said that South Africa has a mixed outlook with respect to attracting FDI in the coming years.
“On one hand, South Africa faces challenges related to governance, exchange rate volatility, and decreased trust in political leaders. The unemployment rate stands at 26.5%, and electricity and transportation infrastructure investments have stalled.
“On the other hand, the country has opportunities to capitalize on its improving economy and regional role. Its GDP growth is expected to reach 0.8% in 2017 and double to 1.6 percent in 2018.”
It said that investors may anticipate that with renewed improvements in South Africa’s infrastructure and education, the country is poised to lead one of the world’s next major manufacturing hubs.
“In fact, industry sector investors in our survey indicated a much stronger preference for investing in South Africa than investors in other sectors did. South Africa’s large semi-skilled and unskilled workforce is likely a draw for these investors as well.”
The report highlighted recent developments in FDI which seem to track with these sentiments.
Automobile production has become a strong source of FDI in South Africa, A.T. Kearney said. For example, in 2016, BMW invested $417 million in the carmaker’s South African operations to begin production of its newest X3 sport-utility vehicle model, it said.