South Africa risks becoming a failed state  

The South African economy is at risk of deteriorating further if its level of fixed investment remains stagnant at 13.2% of GDP. 

This level of investment is insufficient to maintain the country’s current infrastructure and expand access to basic services as the population grows. 

Stanlib chief economist Kevin Lings warned about the dire consequences of South Africa’s sluggish fixed investment growth at the annual INN8 Investment Summit. 

Lings’s presentation centred on what South Africa needs to do to grow its economy, arguing that there has been little discussion of the real problem causing South Africa’s poor performance. 

“In South Africa, the problem is economic growth. That is the be-all and end-all of the country’s current challenges,” Lings said. 

“Over the last four years, South Africa’s economy has barely grown, and the 1.1% we expect this year’s GDP growth to be is not enough.”

Stats SA’s GDP data for the second quarter revealed the country’s economy shrank by 0.2%, breaking the six-quarter positive streak. 

Lings explained that the six-quarter streak was largely driven by cyclical factors, such as falling inflation and declining interest rates. 

“Last year’s growth was almost entirely driven by consumer spending, which grew 3.7%. This was based on R70 billion being withdrawn under the two-pot retirement system,” Lings said. 

“Coupled with that was falling inflation and interest rates. However, that momentum is now slowing down as inflation rises and interest rates tick up.” 

“Growing shopping at 3.7% while overall GDP grows at 1.1% proves that South Africa cannot shop its way to economic success.”

For economic growth to be faster and more durable, South Africa has to, in simple terms, build more things. 

This requires a significant and sustained increase in fixed investment, which is currently at 13.2% of GDP.

In contrast, developed economies spend 20% of GDP on fixed investment, while emerging markets spend 30%. 

“As a developed economy, you have to spend 20% of GDP on fixed investment to maintain existing infrastructure. If you want to build out infrastructure, you have to hit 30% of GDP,” Lings said. 

“South Africa’s fixed investment rate sits at 13.2%. South Africa risks becoming a failed state if it stays at that level while the population continues to grow.” 

“This rate of investment is not enough to maintain the country’s existing infrastructure, so it will continue to decay, and it cannot cope with a population growing 1.3% annually.” 

Lings pointed to South Africa’s economic growth between 2004 and 2007 as an example of what can happen when fixed investment improves. 

During that period, South Africa spent above 20% of GDP on fixed investment, and the country averaged 5% GDP growth for four consecutive years. 

“This can happen again in South Africa, off a low base. But there has to be investment in infrastructure, in machinery, and in equipment,” Lings said.