South Africa

South Africa’s fixed investments declined dramatically

South Africa down

Peter Worthington, a senior economist at Absa, revealed that South Africa’s fixed investments have been declining for years.

Worthington said South Africa has a low gross fixed investment ratio of 14% of GDP, well below the target of 30%.

At current levels, fixed investment is not enough to keep pace with the depreciation of the capital stock.

It implies that investment spending in South Africa is currently mostly directed at maintenance rather than expansion of productive capacity.

One of the reasons is that the actual public investment spending consistently lags behind the government’s ambitious plans.

What is needed to rectify the situation is an acceleration of capital expenditure (Capex) by the government.

However, while the government says South Africa is open for business, the reality is that the business environment is not favourable to attracting fixed investment.

Worthington said many things need to be done to make South Africa attractive for local and international businesses to start investing.

One of the biggest deterrents to local investments is the political climate, which includes policy uncertainty, political tension, and a weak state.

“We also have big infrastructure problems. The country’s infrastructure has degraded significantly,” he said.

It includes electricity shortages and load-shedding, water problems in parts of the country, and poorly run ports.

The infrastructure needs to be fixed to create an environment where investors are confident to put their money.

Another challenge for businesses is safety and security. Crime is rampant in South Africa, which includes extortion gangs targeting the construction industry.

The mining industry is also suffering from a poor legislative environment, where transferring mining rights is a huge challenge.

As a result, business sentiment is mired in pessimism, preventing them from investing in South Africa.

Should these problems be resolved, Worthington said, business sentiment will lift, and investments will follow.

The charts below show the decline in fixed investments in South Africa.

South Africa’s fixed investment ratio (% GDP) has declined – a lot

South Africa’s Capex is low by international benchmarks

Net capital formation has turned negative