Private sector keeping South African economy alive – but there’s a catch

Private sector investment in South Africa is keeping the economy alive as government investment declines due to its dire financial situation. 

However, this investment is not being used to grow private businesses but simply to keep them operating through ‘subsistence investing’ in alternative energy sources, security, and increasingly backup water systems. 

Overall, fixed capital formation as a share of GDP is declining, indicating reduced investor confidence in the South African economy. 

Towards the end of 2023, this decreased further by 0.2%, following a contraction of 3.8% in the third quarter of last year. 

The Reserve Bank attributed this decline to decreasing public sector investment in South Africa, while private sector investment remained flat. 

Investment from the public sector includes money put to use by public corporations, such as Eskom, Transnet, SAA, and other state-owned enterprises (SOEs). 

Real fixed capital spending by the public sector decreased by 0.6% in the fourth quarter of 2023, following a decrease of 4.8% in the preceding quarter. 

This resulted from both public corporations and the general government decreasing investment spending. 

Real fixed capital expenditure by public corporations decreased by 1.0% in the fourth quarter of 2023, subtracting 0.1% from total gross fixed capital formation growth. 

Investment in machinery and equipment, computer software, computer equipment and construction works by SOEs decreased in the fourth quarter of 2023. 

On an annual basis, fixed capital expenditure by public corporations decreased by 1.8% in 2023, with their share of total nominal gross fixed capital formation decreasing to 10.3% last year.

The overall decline of fixed capital formation, a proxy for investment in the economy, and the corresponding greater reliance on private companies for investment are shown in the graphs below. 

However, investment from private companies will not result in economic growth as this kind of investment is mainly for subsistence – an investment to keep the business open and not expand its operations. 

This investment will thus not result in a permanent increase in employment by these businesses as the spending is largely once-off. 

Standard Bank chief economist Goolam Ballim noted the increasing level of subsistence investing at the bank’s Economy 2024, even earlier this year. 

Private sector investment has been strong predominantly due to the need for alternative sources of energy, water, and logistics, Ballim said. 

Thus, this investment may temporarily boost the economy but will not result in prolonged economic growth or a permanent rise in employment. 

Investment in growth would require a fundamental shift in South Africa to a period of policy stability, swift implementation of reforms to address structural issues, and greater confidence in the economy. 

Furthermore, Ballim noted that private sector investment is still 10% below its 2008 peak. This highlights companies’ lack of confidence in the South African economy. 

The sustained lack of private-sector investment has resulted in lacklustre economic growth in South Africa. 

The lack of private-sector investment in the economy is shown in the graph below, with investment from state-owned enterprises also struggling to reach the levels seen in 2008.