Private businesses pulling billions out of South Africa
Data for the first quarter of 2024 shows that investment in South Africa declined by 1.8%, with the sharpest fall occurring in private investment—meaning billions of rands pulled out of the country.
According to a report from Trade & Industrial Policy Strategies (TIPS), an economic research institution, the latest data shows a 1.8% decrease in investment during the first quarter of 2024.
This marks a notable 6.6% decline from the second quarter of 2023, a period when investment levels had finally surpassed pre-pandemic levels for the first time since the onset of the lockdown.
The investment rate, which illustrates the proportion of investment in the GDP, decreased to 14.8% from 15.3% in the second quarter of 2023, 15.5% in 2019, and 18% in 2015.
The steepest decline was observed in private investment, which dropped by 3.3% in the first quarter of 2024.
Similarly, even the government reduced its investment by 2.4%, while state-owned companies saw a decline of 1.3%.
Concerningly, TIPS added that South Africa’s investment rate is low compared to global standards.
It is similar to Brazil’s investment rate but lower than other African and Latin American countries.
Notably, Asia, particularly China, has a remarkably high investment rate. Most economists argue that an investment rate between 20% and 25% is essential for sustaining long-term growth, and South Africa is well behind this mark.
Higher rates are linked to significant inefficiency and decreasing returns, while lower rates are associated with insufficient maintenance and expansion of productive assets, as well as economic and social infrastructure.
As a result, South Africa has experienced a significant outflow of funds over the past decade.
According to the South African Reserve Bank (SARB), estimates suggest that hundreds of billions, and possibly as much as R1 trillion, have left the country.
In its first Financial Stability Review of the year, the SARB highlighted that both local and foreign investors are withdrawing substantial sums of money from South Africa.
Specifically, in the first quarter of 2024, foreign investors sold R12.4 billion worth of JSE-listed bonds, following net purchases of R11.2 billion in the fourth quarter of 2023.
The SARB also reported that non-residents’ holdings of domestic shares reached a new low of 27.6% at the end of March 2024, indicating a continued outflow from the equity market.
In 2022, the South African Reserve Bank (SARB) took a significant step by increasing the offshore prudential limit for domestic institutional investors.
As a result, all South African institutional investors, including insurance, retirement, and savings funds, are now allowed to allocate up to 45% of their total retail assets for investment outside of South Africa, with an additional 10% Africa allowance.
This adjustment aims to offer local savers the opportunity to diversify their investments in global markets, potentially leading to higher returns.
However, it has also prompted a significant outflow of capital from South Africa.
This has led to the offshore allocation of domestic institutional investors totalling the same value as South Africa’s entire nominal GDP, more than doubling since 2012.
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