SA must invest in its true global worth
If SA had a halfway decent economic growth rate and more investor-friendly politics, it would be flying. That’s the only conclusion one can come to from a crop of new reports on foreign direct investment and international capital flows. Despite its fraught politics, uncertain policy environment and near-zero growth rate, SA comes out looking surprisingly good.
But is this perception or reality? And will it last? Real economy foreign investors are certainly interested in SA and the region, if reports from management consultancies AT Kearney and FTI Consulting are anything to go by.
Indeed, SA is being viewed more favourably by the global CEOs surveyed by AT Kearney, with the result that it is back on the consultancy’s Foreign Direct Investment (FDI) Confidence Index after a two-year absence.
The FTI report, based on a survey of “prominent opinion leaders”, identifies SA as one of the five African countries that are most successful at marketing themselves to foreign investors. But that doesn’t mean investors are entirely convinced: almost half were “slightly positive” on southern Africa’s prospects and less than a fifth were “very positive”.
The release of the FTI report is timed for this week’s World Economic Forum on Africa meeting in Durban, as is EY’s annual Africa Attractiveness study, based on FDI outcomes rather than perceptions.
Investment into the continent improved in 2016 after Africa had its worst year in two decades in 2015, but investors continue to prefer Africa’s “anchor” economies, says EY, with almost 60% of FDI to the continent going to just five countries.
SA remains the largest hub economy, receiving almost 7% more FDI projects in 2016, taking more than a fifth of Africa’s total projects. But the details show SA is lagging: project growth for Africa as a whole was faster, at 12%, and other countries took the lion’s share of the higher-value investments and jobs.
As important for future prospects is that SA has been toppled from the top of EY’s “FDI Attractiveness Index” by Morocco and is now in joint second place with Kenya.
Yet SA is still up there with investors, in part because growth has bottomed out and can only improve on 2016’s 0.3%, but mainly because it is still seen as the gateway to Africa, the largest hub in a continent whose longer-term prospects appeal, even if for most investors, according to the FTI study, it’s not yet “strategic” for their growth.
In practice, that means the amounts of real economy investment flowing in are far from huge in the short term, even if investors think SA and Africa are punts for the long term. FDI inflows to SA picked up to about R 33bn in 2016, but they were still more than countered by outflows.
Ideally, there would be a lot flowing in, creating jobs and connecting SA to new markets and new technologies — but improved perceptions notwithstanding, it is hard to see why investors would commit to long-term projects or acquisitions in a low-growth economy in which it is far from clear that the powers that be want big foreign companies to come in and set up shop.
But if FDI is a net negative for SA’s balance of payments, fortunately portfolio investment — into bonds and equities — continues to be positive, providing the cash the country needs to close the account gap. The wash of inflows to the bond market, in particular, has little to do with SA and much to do with global factors that have resulted in global investors piling into more risky, higher-yielding emerging market assets.
Far from deterring these financial market investors, the recent cabinet reshuffle and ratings downgrades may even have added to SA’s attraction, at least temporarily, by increasing bond yields — as well as by the possibility that things might get better.
These are investors who have piled into recession-hit Brazil or politically dodgy Turkey to an even greater extent than they have into SA, drawn in part by the prospect that growth or stability could improve in those countries.
The danger is that when reality doesn’t match those perceptions, financial market players could exit as fast as they entered. And there may already be reason for concern, particularly for SA.
The Institute for International Finance says emerging markets, excluding China, had their best three months of portfolio inflows since 2014 in the latest quarter, most of it going to debt rather than equity. But it is largely a yield play — FDI and banking flows were negative for the quarter, so overall flows were not great.
And in SA’s case, the $1.7bn of inflows during the first quarter of 2017 were less than half the $3.6bn in the matching period in 2016.
Following the money suggests, then, that SA needs to work a lot harder to nurse the positive perceptions and justify them with some reality.
THE DANGER IS THAT WHEN REALITY DOESN’T MATCH THOSE PERCEPTIONS, FINANCIAL MARKET PLAYERS COULD EXIT AS FAST AS THEY ENTERED
Joffe is editor-at-large.