Investment in South Africa falls to where it was twenty years ago

Fixed investment in South Africa is back at 2004 levels, with reduced business confidence impacting private-sector investment and the government’s finances severely constrained by years of mismanagement.

This is feedback from Oxford Economics in its latest Africa Watchlist for 2025, outlining what would be needed for the South African economy to boom. 

The report explained that South Africa is in a far better position than in the past, with most institutions having a more positive outlook for the country’s economy. 

At the beginning of 2025, the mood is decidedly different in the country than it has been for much of the last decade.

Load-shedding now seems a thing of the past and will most likely never again be as severe as in 2022 and 2023 due to extensive reform of the country’s electricity sector. 

Reform of the logistics sector is also gathering momentum, with Transnet publishing its Rail Network Statement late in 2024. This paves the way for private players to run trains on its tracks.

The election also saw the formation of a Government of National Unity (GNU), which ensured that South Africa’s future was no longer dependent on the decisions of a single political party. 

This government has repeatedly stated its ambition to grow the South African economy at over 3% per annum within the next few years. 

Oxford Economics thinks this target is very ambitious, requiring extensive reform and greatly increased investment in the local economy. 

To achieve this aim, the government launched Phase 2 of the Government Business Partnership in October 2024. 

The initiative leverages private sector capital and expertise to address the country’s biggest socio-economic problems, with the focus areas being reforming the energy and transport sectors and combating crime and corruption. 

During the launch of the second phase, the partnership set a 3.3% GDP growth target for next year. Assumptions include expedited reforms, rapid operational improvements at Transnet and Eskom, and a surge in private investment.

To achieve this growth, mammoth investment in the local economy is required, with fixed investment at around 7.8% of GDP. 

This figure is only around 2% and is forecast to be negative 3.8% for 2024. Oxford Economics said achieving the planned 7.8% would be a remarkable turnaround. 

This scenario also assumes strong growth in the other GDP components. However, the report explained that the fixed investment component is the key among all the elements. 

Increased fixed investment would have many positive externalities, such as facilitating exports,  allowing factories to increase production and miners to get goods to ports. 

Furthermore, it would get idle capital off the balance sheets of corporates and stimulate spending. 

Oxford Economics explained that the slump in fixed investment over the past two decades is indicative of the country’s broader economic decline. 

Political uncertainty and low economic growth are the two largest hurdles preventing this cash pile from being deployed. 

Most investments over the past few years have been referred to as ‘subsistence investing,’ in which companies allocate capital to keep their businesses functioning rather than investing for growth. 

As a result, this investment, typically used to acquire alternative energy or water systems sources, does not grow the economy or increase employment. 

It is also effectively a vote of no confidence by corporations in the local economy as they do not see the opportunity to earn a suitable return on investment.

In fact, real fixed investment per capita is now similar to 2004 levels, the report said. 

The investment makeup has also changed over the past 20 years, with the broader downturn in investment attributable to a simultaneous drop in public investment.

While the government could drive this investment, its poor financial health and historic misallocation of capital suggest that the private sector will have to drive the boom in fixed investment. 

Without any additional public investment, private sector investment will have to increase by 11.4% next year for the economy to hit the 3.3% GDP growth target. 

This translates into nearly $40 billion (R738 billion) in new investments, which is equivalent to just over 9% of GDP. 

On a positive note, this figure is not unprecedented as annual investment exceeded this amount over 2011-2013. 

Although economic confidence levels are much weaker than they were in 2011-2013, and the assumptions regarding policy reforms seem overambitious, these figures suggest that the 3.3% GDP growth target is not that farfetched.