South Africa’s economy heading for disaster
Fixed investment in South Africa has continued its steady decline since its pre-pandemic levels, with businesses hesitant to invest heavily in a stagnant economy and the government coming under financial pressure.
This type of investment is crucial for economic growth as it is highly productive, adding to economic activity and tends to be over a long-term horizon, meaning it does not leave the country.
Other types of investment, such as portfolio investment in equities and bonds, are often termed ‘hot money’ as they can leave at the touch of a button.
However, fixed investment has steadily declined in South Africa, with the capital deployed by businesses and the government failing to recover post-pandemic.
The Reserve Bank revealed this in its latest Quarterly Bulletin for the last three months of 2024, which outlined a stagnant local economy with a bleak outlook.
The bank’s data showed that real gross fixed capital formation, an indication of fixed investment, declined across the board in 2024.
This is despite renewed optimism surrounding the country’s economy following the formation of the Government of National Unity (GNU) in June last year.
After the formation of the GNU, business confidence rebounded strongly as it was widely viewed to be the most business-friendly government South Africa has ever had.
However, on an annual basis, real capital spending by private businesses decreased by 4.1% in 2024, following an increase of 3% in 2023.
As a result, the private sector’s share of total nominal gross fixed capital formation decreased from 72.4% to 72.1%.
This annual decline is despite an increase in real gross fixed capital formation by private businesses of 1.5% in the final quarter of the year, reflecting improved business confidence.
Increased investment expenditure was recorded in computer equipment and software as well as construction works in the fourth quarter.
The decline in investment from the private sector was matched by the government, which saw its real capital spending decline by 6.1% in the final quarter of 2024 due to reduced infrastructure investments.
Capital expenditure by public corporations contracted further by 7.4% in the fourth quarter of 2024 from 1.0% in the preceding quarter, alongside lower investment spending on construction works, machinery and equipment, as well as transport equipment.
On an annual basis, fixed investment by public corporations decreased by 2.2% in 2024, following an increase of 9.9% in 2023.
However, the share of public corporations in total nominal gross fixed capital formation increased slightly to 10.5% in 2024 from 10.4% in the previous year.
The inability of fixed investment to recover to 2019 levels can be seen in the graph below.
Companies sitting on trillions
South African companies have around R1.4 trillion in excess cash—a record high—as they prefer to let the money earn interest in a bank account rather than risk it investing in the local economy.
This is primarily due to the country’s economy having effectively stagnated in the last decade, recording an average annual growth rate of 0.8%.
As a result, companies are not willing to deploy their cash in an economy where returns are hard to come by and are plagued by political uncertainty.
This is feedback from Stanlib chief economist Kevin Lings, who explained that this puts South Africa’s economy in a precarious position.
In the past decade, consumer spending has driven South Africa’s meagre economic growth, and the historic drivers of mining and manufacturing have stagnated.
This is not necessarily a bad thing, Lings said, as many economies are reliant on consumer spending.
The problem in South Africa is that a large chunk of this is supported by the government giving out social grants, with 28 million people relying on cheques from the state.
With this being supported by only 7.9 million personal income taxpayers, the financial equation is unsustainable.
For Lings, the answer lies in infrastructure investment, which can build economic confidence, drive growth, and make South Africa more efficient.
Crucially, this would also solve significant constraints on the local economy, such as an unreliable power supply and logistical bottlenecks.
However, the government does not have the balance sheet to afford this investment, which Lings estimated at R100 billion a year just to return the country’s infrastructure to adequate levels.
Unfortunately, South African corporates have been unwilling to invest in the local economy due to its poor economic growth and policy uncertainty.
“The private sector is in excellent shape. If you look at the cash in corporate balance sheets, this is cash in the bank. It sits at over R1.4 trillion. This is a record high,” Lings said.
“We know that South African corporates have a good balance sheet and that there is money in pension funds. There is money waiting to invest in infrastructure.”
The key issue for Lings is that getting this money off the sidelines requires the right approach from the government to ensure that private investors can get a return and that the money will be used correctly.
“If the government embraced public-private partnerships, we would unlock that balance sheet. I am confident that the government understands this.”
However, Lings said the government needs to understand what has made these partnerships work in the past and pointed to the electricity sector as the best example to follow.
“The biggest success story of this is obviously if we look at our electricity development. When they deregulated the sector, the private sector stepped in and has built a huge amount of energy infrastructure.”
“It demonstrates that if you deregulate, the private sector will step in and invest. The argument is to do that for all the infrastructure where we have a major backlog.”
“The private sector has the balance sheet, and it wants to invest. If the government stepped away and deregulated sectors to allow the private sector in more, we are convinced that we will get the investment needed to lift the growth rate.”
“Slowly, very slowly, the government is coming around to that idea, so we are very optimistic on a medium-term basis.”
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