One thing holding South Africa back

Compared to developed and other emerging markets, South Africa’s gross fixed capital formation (GFCF) is significantly low, hindering economic growth.

GFCF, also known as “fixed investment”, is a key macroeconomic indicator measuring the value of new and existing fixed assets acquired by businesses, governments, and households. 

These assets include equipment used in production processes, factories, offices, residential dwellings, roads, bridges, railways, utilities, and intellectual property like patents, copyrights, and trademarks.

GFCF is a crucial driver of economic growth. When businesses invest in new assets, they can increase their production capacity, improve efficiency, and create jobs. This, in turn, boosts overall economic activity.

This makes GFCF essential for the development of an economy. Investments in infrastructure, education, and healthcare not only grow the economy but improve the quality of life for citizens and attract foreign investment.

In essence, GFCF is a measure of an economy’s ability to invest in its future and create sustainable growth. 

A high level of GFCF indicates a healthy and dynamic economy, while a low level may suggest economic stagnation or decline.

South Africa’s economic growth has been sluggish for years. Aside from a post-lockdown economic rebound in 2021, it has not achieved GDP growth above 2% in a decade.

TreasuryONE currency strategist Andre Cilliers attributes this partly to ongoing de-industrialisation and inadequate levels of fixed investment.

He said South Africa’s fixed investment makes up just 14.6% of GDP, compared to a typical 30% in healthier economies. 

“This environment erodes confidence in the country’s ability to stimulate sustainable economic growth, even if bold predictions like Minister Mantashe’s 8% growth from the petroleum sector come to fruition,” Cilliers said. 

“The lack of capital project investments and a deteriorating state-owned enterprise (SOE) sector, highlighted by TotalEnergies’ exit from upstream petroleum projects, exacerbate this bleak outlook.”

In South Africa, economic growth is heavily reliant on GFCF investments from the private sector to boost the economy.

Investec chief economist Annabel Bishop recently analysed fixed investment trends in South Africa.

Bishop found that the private sector has made 71% of the fixed investments in South Africa since 2017, up from 65% in the prior eight years.

In contrast, the government and SOEs only made around 17.5% and 11.7% of fixed investments in the country, respectively.

“The private sector continues to generate the most fixed investment in the country, persistently accounting for the bulk of new investment in machinery and other equipment, including transport equipment and residential buildings,” Bishop said.

However, there are some green shoots appearing in the economy that could see this situation improve.

While fixed investment spending temporarily declined in the second quarter of 2024 due to political uncertainty surrounding the general election, investor sentiment has significantly improved following the formation of the Government of National Unity. 

This positive shift in sentiment has contributed to increased optimism about the country’s economic prospects.

Looking ahead, GFCF is anticipated to experience growth in the coming years. The private sector, supported by the government’s business-government partnership, is expected to remain the primary driver of this growth. 

This partnership, which recently entered its second phase, aims to foster a more conducive environment for investment and economic development.

Bishop said fixed investment growth of nearly 4% year on year is expected in 2024 in real terms, and this will likely lift to around 5.0% in the next two years. 

She expects that, by 2029, fixed investment will have grown to 7.0%, with GFCF constituting 14% of GDP. 

“Fixed investment is expected to continue to be driven by the private sector over the medium-term, with similar growth rates to total fixed investment, aided by the business-government partnership, with phase two launched this week,” Bishop said.

South Africa’s fixed investment compared

Daily Investor compared South Africa’s fixed investment as a percentage of GDP to other countries.

We examined both developed economies, such as the US and Germany, and emerging markets, such as South Africa’s BRICS partners.

This revealed that South Africa’s fixed investment lags significantly behind both developed and emerging markets, something that needs to be addressed to grow the country’s economy.

The table below shows how South Africa’s fixed investment levels stack up against other countries.

Country	Gross fixed capital formation as a % of GDP
China	43%
India	34%
South Korea	32%
Turkey	32%
Democratic Republic of Congo	32%
Indonesia	29%
Mexico	24%
Germany	22%
Russian Federation	22%
USA	21%
Argentina	19%
UK	18%
Brazil	17%
South Africa	15%
World	26%