South African investment problem

Investment in South Africa is still significantly below 2019 levels, hindering economic growth and showing a lack of confidence in the country’s policy direction. 

South Africa has long had an investment problem, with corporates hesitant to invest in a stagnant local economy. 

However, the main reason investment remains below 2019 levels is the country’s lack of regulatory and policy certainty. 

Stanlib chief economist Kevin Lings revealed this during a presentation on the country’s economic performance in the second quarter of 2024. 

Lings said private companies, in particular, have been reluctant to invest in growing their businesses in South Africa. 

Many have chosen to keep cash in the bank rather than commit to long-term projects that require a stable operating environment and the potential for substantial returns on investment. 

Instead, companies have only really committed capital to keep their doors open by finding alternative energy sources and, increasingly, backup water systems. 

This is referred to as subsistence investing, which keeps a company operational rather than growing its business and the number of people it employs. 

It is hoped that the formation of the Government of National Unity (GNU) will change this picture, but it will take time and major progress on key reforms. 

Currently, most of the optimism related to the GNU is confined to financial assets, with bond yields declining, the rand strengthening and the JSE outperforming its peers. 

However, this is ‘hot’ money invested in liquid portfolio assets that can be relatively quickly sold on bad news. 

Building new sites of production and infrastructure to grow the economy requires significant capital to be invested over a long period. 

For companies to engage in this type of investment, there has to be a stable operating environment and a growing economy that can ensure a return on the investment. 

Before companies invest in this fashion, they will wait for evidence from the GNU that it is implementing key reforms and economic growth is picking up. 

South Africa’s declining levels of fixed investment is shown in the graph below, with all organisations reluctant to pump money into the local economy. 

An underlying reason for this is the limited pool of capital for South African companies to tap into for funding as the country’s savings rate remains exceptionally low. 

Despite an uptick during periods of high growth in the mid-2000s, South Africa’s household savings rate has consistently been below 5% of GDP. 

This has progressively worsened over the past few years, with household savings being negative for the last six quarters. 

Not only is this damaging to their personal finances, but it significantly impacts economic growth by limiting the local funding base for major investment projects. 

As Stanlib’s senior economist Ndivhuho Netshitenzhe explained, any reduction in savings decreases the pool of funds available for investments. 

This particularly affects the private sector, which relies heavily on debt-based funding for its projects. 

While big corporations and the government can tap international investors for funds, smaller companies must turn to banks for loans to fund their growth. 

Netshitenzhe said that South Africa’s savings rate has declined to the point where even the government and big corporates will struggle to tap investors for funds. 

Furthermore, the government’s massive debt pile has ensured that it has crowded out private companies looking to raise debt to fund growth. 

Old Mutual Wealth investment strategist Izak Odendaal said a low savings rate implies a low investment rate unless foreign savings can be imported by running a current account deficit.  

This is fine under normal conditions, but the major drawback is that these foreign flows can be reversed, especially if they are largely portfolio investments.  

This is the case in South Africa, where most foreign capital inflows head for the JSE to buy bonds or equities – ‘hot money’ that can leave at the click of a button – instead of being invested in long-term businesses as ‘foreign direct investment’.

The graph below, courtesy of Stanlib, shows how poor South Africa’s savings rate is compared to its emerging market peers.