South Africa’s missing piece

While public sector spending on infrastructure rose for the third consecutive year in 2024, it remains below levels seen in 2016 and is insufficient to meaningfully grow the economy.

South Africa desperately needs to increase its investment in infrastructure and other productive assets to revitalise the economy and set the country up for future growth.

This spending will need to come from both the public and private sectors, which will require significant changes in government regulations and policies.

Statistics South Africa (Stats SA) recently released the data on public sector capex for 2024, which showed that public-sector spending on infrastructure and other fixed assets continued its upward trajectory.

This includes spending by national government and provincial government departments, municipalities, public corporations, higher education institutions and extra-budgetary accounts and funds.

Marking the third year in a row, public sector spending on infrastructure and other fixed assets rose to R276 billion in 2024, up from R234 billion in 2023.

However, despite this positive momentum, Stats SA pointed out that this total remains below the peak of R283 billion seen in 2016.

In addition, it is important to note that the past three years of increases came after five consecutive years of decline in spending on infrastructure.

South Africa’s public sector capex has been on an upward trajectory since the early 2000s, with a boom seen in 2009 ahead of the 2010 FIFA World Cup.

Following this boom, public sector capex continued to rise steadily year after year, reaching a peak in 2016. However, the five subsequent years saw a noticeable decline, before picking up again in 2021.

Experts have often attributed South Africa’s economic decline over the past decade, in part, to these weak levels fixed investment.

This is because fixed investment, unlike other economic growth drivers like consumer spending, is not based on short-term cyclical factors like low inflation and high interest rates.

Currently, fixed investment only constitutes 15% of South Africa’s GDP, which is considered very low, even compared to the country’s fixed investment peers.

The global average sits at around 26%, making South Africa’s very low and only half of the 30% target the government set for itself for 2030.

Calling in the private sector

A large part of the reason for South Africa’s low levels of fixed investment is the private sector’s hesitancy to invest in the country’s lacklustre economy.

In its latest Quarterly Bulletin, the Reserve Bank’s data showed that the private sector’s share of total gross fixed capital formation edged up to 73.7%. 

Therefore, the private sector still constitutes the lion’s share of fixed investment in South Africa’s economy, but a lot of this spending has been maintenance capex.

This means that, companies have essentially been treading water and hoarding cash, waiting for a more conducive environment to invest for growth, rather than survival and maintenance.

Stanlib chief economist Kevin Lings previously explained that, in an ideal world, the public sector would be the primary driver of fixed investment.

However, he explained that the state’s balance sheet has been weakened to such an extent that this is no longer an option, with the government now dependent on the private sector to drive fixed investment.

Luckily, the private sector has more than enough capital to boost fixed investment significantly, with around R1.8 trillion ready to deploy into the economy.

To encourage corporates to take their cash off the sidelines, the government will need to create a more enabling environment, with deregulation set to play a key role.

“I would say that deregulation is your only option now. It is your only choice, and while you may not like it ideologically, it is your only option,” Lings said. 

“You are out of options, and those options have been taken away because you took government debt from 26% to 76% of GDP. That increase meant you have taken away your option to use your own balance sheet.”