South Africa must invest R1.1 trillion to grow the economy by 1%

South Africa needs R14.50 in investment to generate R1 in incremental economic growth, whereas faster-growing and more efficient economies require only R3 in investment. 

Translated into South Africa’s real economic figures, this means the country must invest R1.1 trillion to grow its economy by 1%. 

This is extremely inefficient and points to South Africa’s challenge not being a lack of capital, but also a shortage of productive places to invest it. 

Old Mutual Corporate conducted research on this topic to analyse why increased investment does not translate into economic growth as efficiently in South Africa. 

The research showed that the issue is often mischaracterised as a lack of capital to invest due to low domestic savings rates and a lack of foreign investment. 

South Africa does need additional investment to lift economic growth, but Old Mutual Corporate said that is not enough by itself. 

“South Africa has spent years debating how much growth we need and how much investment it will take to get there,” Old Mutual CEO Jurie Strydom said. 

“We also need to ask what happens to a rand once it is invested. More capital matters, but it only changes the growth trajectory if it adds productive capacity.”

South Africa definitely does lack capital, with the research showing that it invested an average of 14% of GDP over the five years to 2025. 

This compares to 22% for the average economy. The average economy grew by 3% per annum over that period in comparison to South Africa’s 1%. 

“If you do not have elevated savings and investment, you will not get economic growth. Full stop,” research partner Professor Adrian Saville said.

“Across the countries studied, there was not a single example of an economy moving from poor to prosperous without materially higher savings and investment.” 

Old Mutual’s research shows that South Africa is heavily reliant on domestic savings for its fixed investment in infrastructure, machinery, and equipment. 

93% of South Africa’s fixed investment is financed from domestic savings, making the country’s capital base an important constraint on how much can be invested. 

This is largely due to the country’s poor credit rating, which prohibits global pension funds and other vehicles from investing heavily in South African assets. 

It is also a reflection of the country’s sophisticated and well-developed financial system. 

Getting bang for your buck

South Africa has plenty of capital, with it being home to the largest banks in Africa and holding the majority of the continent’s pension assets. 

What the country struggles with at the moment is getting bang for its buck, Old Mutual Corporate’s research showed. 

The research estimates that South Africa needs to invest R14.50 to generate one additional rand of output. In comparison, the most capital-efficient economies need R3 to R5 to generate a rand of growth.

This shows that how the money is deployed is also extremely important, as a more efficient investment can result in significantly faster growth. 

Old Mutual Corporate modelled what would happen if South Africa just increased the amount of capital it invested, without improving the efficiency of returns. 

If South Africa doubled its fixed investment rate from 14% towards 30% and capital efficiency is unchanged, economic growth would rise to 2%. 

Improving capital efficiency alone for the existing amount of capital would get economic growth closer to 3% per annum. 

When both more capital and greater efficiency are combined, the model shows that economic growth can surge to 6% per annum. 

 “A larger pool of capital is necessary, but it is not sufficient. If that money simply moves into existing assets without adding productive capacity, we have not solved the growth problem,” Saville said. 

“The test is whether investment creates the infrastructure, businesses and productive assets that allow the economy to do more.”

In other words, South Africa’s capital needs better investment opportunities, which requires a degree of government reform. 

The research identifies electricity transmission, water systems, rail corridors, and ports as examples of long-duration assets that can enhance economic capacity and productivity.

Strydom acknowledged the progress being made through the Presidency to strengthen South Africa’s infrastructure pipeline, including through Infrastructure South Africa and efforts to improve how projects are planned, prepared, financed and delivered.