Can SA break the investment stalemate and steer towards economic revival?

Domestic investment, also known as gross fixed capital formation (GFCF), is a key driver of economic growth and development. The National Development Plan (NDP) targets 30% of domestic investment as a percentage of GDP for rapid economic development.

Over the last decade, this target has not been achieved. Investment has been low at between 13% to 17% of GDP. Domestic investment is critical for rapid economic growth and development because it increases production capacity and productivity. It also allows for technology development, economic sectoral diversification, infrastructure development, improved business confidence, and economic stability.

Why are we having this ongoing “investment strike”, even though it’s President Cyril Ramaphosa’s pet project?

The answer is that multiple factors have created this “perfect storm” and are pushing local and international investors away from the country. The push factors are much stronger than any of the pull factors.

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Push factors include a slow economic growth environment; currency volatility; policy uncertainty regarding property rights, land reform and land ownership; lack of a mining investment charter; political instability with coalition government; crumbling infrastructure including electricity “load shedding”; high crime rates which are out of control; poor levels of governance, including corruption; uncertainty regarding affirmative action and race-based legislation such as BBBEE; and a negative global perception of the country’s socioeconomic and political environment.

Factual data paints a dark picture of the domestic investment situation. As indicated in Graph 1, in the 1st quarter of 2018, the total investment was R769.4-billion; by the 1st quarter of 2024, this amount had declined to R662.6-billion. This relates to a percentage decline of 13.9% over the last six years.

Since the end of Covid-19, from Q1 2022 to Q1 2024, the level of domestic investment has shown a slight increase of 1.8%. The trend line on the graph indicates this ongoing decline in investment. The highest level of investment during the period was in Q1 in 2018 while the lowest level was in Q2 in 2020. Domestic investment was already low before Covid-19, and investment levels have not recovered after Covid-19 to the 2018 levels.

Graph 1: Domestic Investment from 2018 to 2024. (Source: SARB, 2024)

Graph 2 indicates the level of investment in relation to GDP from 2018 to 2024. Again, the trend is negative, as shown on the graph. The 30% target level of investment to GDP has not been achieved over the last six years. The highest level was achieved in Q1 of 2018, while the low point was Q2 of 2021. The last three quarters have shown a further steady decline in the percentage investment to GDP to the current level of 14.3%.

Graph 2: Investment as % of GDP. (Source: SARB, 2024)

In terms of specific economic sectors and domestic investment, all 10 main economic sectors achieved negative investment growth rates except the construction sector (see Graph 3). The sectors with the largest decline in investment are utilities (electricity and water generation), followed by manufacturing and government. All the economic base sectors, namely those sectors that have the potential to generate exports and jobs, have declined over the last six years.

Graph 3: Annual growth rates for economic sectors in domestic investment from 2018 to 2022. (Source: Quantec, 2024)

How could the domestic investment “ship” be turned to attract huge investments, at least double the amounts we have experienced over the last decade? Here is a seven-point plan to achieve 30% of the investment of GDP:

1. Good governance: Improved policy certainty with stable governance across all three spheres of government and all economic sectors. This includes political stability, especially considering the country's coalition government formation. Also, corruption should be prevented across all levels of government. Lastly, only the best of the best should be appointed to work for the government, allowing an agile and fast government;


2. Infrastructure capacity development: Resolve the shortcomings related to electricity, water, sanitation, transport, and logistics at ports in support of export activities. The “ceiling” preventing rapid growth due to infrastructure capacity should be removed;


3. Economic development plan: A clear plan with market-friendly policies supporting the economic base sectors is required. The role of government needs to be reduced and allow the private sector to grow the economy, create jobs and assist with service delivery. Government should focus on the provision of an enabling environment as its priority;


4. Education and entrepreneurship development: The rapid adjustment of education on all levels to adapt to a changing world of technology is required to provide the “right” skills to the market. Also, accelerated support to promote entrepreneurialism should be facilitated;


5. Safety and security: Restore law and order as a matter of urgency and reduce the high levels of crimes across the country;


6. Financial markets: South Africa is still rated as “junk status” within the global investment market by the three major risk ratings agencies, meaning high levels of risk for investors compared with other more stable countries. “Junk status” refers to a country’s credit rating being below investment grade by major credit rating agencies such as Moody’s, Standard & Poor’s (S&P), and Fitch. The country has also been grey-listed by the Financial Action Task Force (FATF) as having deficiencies in its measures to combat money laundering, terrorist financing, and other related threats to the international financial system. All efforts should be made to move to positive investment grading for international and local investment; and


7. Monetary policy: The current conservative monetary policy is not supporting economic growth. An inflation target mid-point of 4.5% is too low for a developing country, resulting in stubbornly high interest rates and low economic growth. The inflation target midpoint should be increased to between 5.0% and 6.0% to allow for growth and development. DM