Money flooding out of South Africa – crushing economic growth

South Africa has experienced large investment outflows over the past five years, which hurt the country’s economic growth. 

A research paper from economists in the South African Reserve Bank’s (SARB) Economic Research Department revealed the effect of net investment outflows on the South African economy.

In the paper, SARB economists explained that there is a strong link between investment and economic growth, with South Africa being particularly reliant on foreign investment to make up for the country’s poor savings rate.

The Reserve Bank said in its Monetary Policy Review that South Africa experienced significant outflows from foreign investors in the first half of 2023.

The SARB attributed the significant outflows to local structural economic issues and geopolitical tensions of the country’s own making.

In particular, it highlighted intensified load-shedding, deteriorating logistics, the Lady R controversy, and general economic underperformance.

Thankfully, by the middle of the year, this outflow eased to be more in line with the average outflows seen over the last five years.

2017 was the last year that South Africa experienced a net inflow into South African equities, with each year since seeing at least R100 billion in outflows.

South Africa’s largest asset manager, the Public Investment Corporation (PIC), flagged its concern about foreigners dumping local assets.

The PIC said geopolitical tensions have made investors risk-averse, leading them to sell emerging market assets, such as South African stocks and bonds.

This has caused capital to flow out of emerging markets and into safer assets, such as US dollar-denominated assets.

Several factors listed in the PIC’s annual report have contributed to the recent capital outflows from South Africa, including:

• Geopolitical tensions
• Electricity supply disruptions
• High unemployment
• Crime and corruption
• High interest rates in developed markets

High interest rates in developed markets have made these countries even more attractive to investors during times of risk aversion.

This has led to a reallocation of capital away from emerging markets, resulting in weaker currencies and higher bond yields in emerging markets.

Commodity-exporting emerging markets, such as South Africa, Brazil, and Chile, have benefited from rising commodity prices. However, commodity prices are now slowing on the back of lower global growth.

Since the start of the pandemic, foreign investors have been selling large quantities of South African bonds and risk assets.

These cumulative flows have not reversed over the past five years. Even though South African bonds still offer some of the world’s best bond yields, foreign investors have largely been selling local government bonds.

Investment outflows significantly affect a country’s economic performance, and the PIC raised its concern that this will negatively impact South Africa’s economy.

The graph below shows that stronger economic and asset price growth periods are strongly associated with stronger equity and bond flows.