Foreign investors pumping money into South Africa – but there’s a catch

South Africa attracted almost R100 billion in foreign direct investment (FDI) inflows in 2023, equal to 1.4% of the country’s GDP, despite the numerous challenges the economy faces. 

However, foreign investors’ positive perceptions of the country’s public governance and business environment are deteriorating, threatening future FDI flows.

This is feedback from PwC, which revealed in its South Africa Economic Outlook focusing on FDI flows into the country and the positive impact foreign investment has on the local economy. 

The financial services firm noted that this was surprising considering the widespread negative sentiment around South Africa. 

“Equally surprising would be data showing that non-residents have a ‘moderately positive’ impression of the country’s business ecosystem and standards of public governance,” the report read. 

However, this is not a surprise when looking at the data over the past decade, with South Africa experiencing positive FDI flows since 2018. 

Data from the Reserve Bank shows that the country’s net FDI flows averaged R58 billion per annum after the global financial crisis, excluding the Covid-induced anomaly of 2021. 

Most recently, South Africa recorded FDI inflows of R96.5 billion (1.4% of GDP) in 2023 and outflows of R5.2 billion (0.1% of GDP) for a net inflow of R91.3 billion (1.3% of GDP). 

PwC said that FDI could prove instrumental in driving business and economic development by providing the local economy with capital inflows, expanding the business into new markets, reducing costs through economies of scale, and enhancing the skills of domestic employees. 

At a macroeconomic level, FDI adds to the country’s GDP, increases employment and household income, and contributes taxes to the national fiscus. 

Thus, while the country has had a run of positive FDI flows, it needs to attract more investment to have a meaningful impact on economic growth and unemployment. 

PwC said this has been driven by a moderately positive perception by foreigners of South Africa’s public governance and business ecosystem, particularly relative to the rest of Africa. 

Research from Bloom Consulting showed that, based on those two metrics, South Africa is roughly in the middle of the pack globally and much better than most locals think. 

Bloom Consulting surveyed the views of people familiar with the country as well as those who are unfamiliar with it. 

On all the metrics considered, those familiar with South Africa had a better opinion of the country compared to those who were not familiar with the country.

It is important to note that South Africa still does have significant issues regarding public governance and service delivery. 

PwC said that World Bank data showed that South Africa’s performance is deteriorating in terms of these metrics. 

Because the country has seen an extended period of deterioration in some key institutional metrics, South Africans all too often view the country as severely underperforming in comparison to what they think many countries in the rest of the world are getting right. 

However, the data shows a middle-of-the-pack performance rather than something more dismal. 

Foreign investors have a ‘moderately positive’ view as well, which is consistent with the country’s performance according to independent analyses.