South Africa facing a capital exodus

South Africa is facing a capital exodus as foreign investors continued to sell billions of the country’s equities in 2023. This was revealed by the South African Reserve Bank’s (SARB) Quarterly Bulletin for Q4 2023.

The report showed that non-South African investors sold R21.6 billion of the country’s equities in the fourth quarter of 2023.

Portfolio investment liabilities recorded a smaller outflow of R9.0 billion in the fourth quarter of 2023, following an outflow of R41.9 billion in the third quarter.

This was due to non-residents’ net sales of domestic equity securities exceeding their net purchases of domestic debt securities. 

However, non-residents’ net sales of debt securities of R23.4 billion in the third quarter of 2023 switched to net purchases of R12.6 billion in the fourth quarter. 

In addition, South Africa’s direct investment liabilities recorded a smaller inflow of R16.2 billion in the fourth quarter of 2023 compared with an inflow of R26.0 billion in the third quarter.

Cumulatively, South Africa’s direct investment liability inflows moderated from R151.0 billion in 2022 to R96.5 billion in 2023.

The SARB attributed this to equity investment by foreign parent companies in domestic companies slowing down.

Annual cumulative portfolio investment liabilities switched to an outflow of R87.5 billion in 2023 from an inflow of R42.6 billion in 2022.

Other investment liabilities reverted to an outflow of R26.6 billion in the fourth quarter of 2023 from an inflow of R52.5 billion in the third quarter.

This is mainly due to the repayment of loans to non-residents and a reduction in non-resident deposits received by the domestic banking sector. 

The SARB said these outflows were partly offset by the national government’s proceeds of a $300 million energy governance loan from the African Development Bank. 

On a cumulative basis, other investment liabilities switched to an outflow of R13.9 billion in 2023 from an inflow of R186.3 billion in 2022.

In a previous Quarterly Bulletin Report, the SARB flagged this capital exodus as a concern.

It said the prolonged sell-off was driven by concerns over the escalating Middle East conflict, poor domestic and global economic growth, and the impact of load-shedding in South Africa.

Investment inflows and outflows have a significant impact on the South African economy.

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

In the paper, SARB economists explained 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.