South Africa’s fall from grace 

Foreign investor sentiment towards South Africa has steadily soured as the country once seen as a champion of good governance became increasingly corrupt and lost its creditworthiness. 

Many South Africans underestimate just how well the ANC ran the country’s economy in the first decade and a half after Apartheid. 

Before 1994, South Africa’s economy stagnated, growing at an average annual rate of 0.2% from 1990. 

The country also came under intense international pressure, with trade embargoes limiting its access to vital resources.

In effect, South Africa’s economy was crippled by the time the ANC came to power in 1994, and the country was battling soaring debt and weakening currency. The country was heading for bankruptcy. 

To turn the country’s economy around, then-President Mandela and Deputy President Mbeki created and implemented a policy framework to cut government debt and grow the economy. 

This was done by gradually reducing government spending to cut its deficit and stabilise the currency and the broader economy. The first democratic administration achieved an annual growth rate of 2.7%. 

South Africa’s economic growth picked up even further under Thabo Mbeki, where it averaged 4.1% growth annually. 

Mbeki’s administration saw the country run consistent budget surpluses, reducing government debt and enhancing its credit rating

This period was also associated with good, clean governance, and South Africa was celebrated internationally as a champion of human rights. 

As a result, foreign investors poured money into South African assets, and the local economy continued to grow strongly. 

However, this was not to last, as the country’s trajectory fundamentally changed in 2008 when Jacob Zuma replaced Thabo Mbeki as leader of the ANC. 

The country was plunged into the era of state capture, where many of its key institutions were hollowed out, and its economic performance declined. 

South Africa quickly gained a reputation as one of the most corrupt countries on earth, and many foreign investors were hesitant to invest in the economy. 

The country’s rise in the world corruption index is reflected in the graph below. The higher the ranking, the more corrupt the country is perceived to be. 

South Africa’s international perception is even beginning to dip below that of some of its African peers, with faster-growing economies on the continent attracting more investment. 

Nedbank economist Isaac Matshego revealed that the effectiveness of South Africa’s government has steadily declined since 1996. 

He explained that Nedbank monitors government effectiveness in delivering education, housing, and security services.

In 2021, its effectiveness dipped into negative territory on this metric. This means the government’s service delivery is actually declining year-on-year, not just improving at a slower rate. 

This has severe ramifications for investment in South Africa, with companies and investors unlikely to invest in a country that has inefficient services. 

When coupled with a stagnant economy, South Africa does not appear to be the most attractive place to invest money. 

Even local corporates are taking note of this and are looking outside of their home country for growth. Some, such as Sanlam and Santam, have looked to India to capture value from the fastest-growing major economy in the world. 

Others have looked closer to home and are expanding into Africa to tap into growing econmies in the East and the West of the continent. 

Standard Bank has been crystal clear about why it is investing outside of South Africa, saying faster-growing economies simply offer a better return on investment. 

“We’re absolutely focused on total shareholder, absolutely focused on it and on managing our portfolio of businesses with discipline,” CEO Sim Tshabalala told Daily Investor. 

“Clearly, the fastest-growing parts of the African continent are the countries outside of Africa and, in particular, East Africa, which is growing at an annual rate above 5%.” 

“Therefore, you want to be allocating your capital to these faster-growing parts of your business for obvious reasons – to grow lending, insurance products, and making acquisitions.” 

South Africa’s deteriorating standing in comparison to its African peers is shown in the graph below.