Way too early to celebrate

Abig song and dance has been made about investment pledges secured by President Cyril Ramaphosa in July, with the Saudis and Emiratis pledging $10bn each and the Chinese promising $14.7bn, bringing him over a third of the way to his target of raising $100bn in five years.

Making promises is one thing; breaking ground on a factory or oil refinery quite another. So let’s keep the champagne on ice until we see those dollars actively at work on South African soil.

The reality is that Ramaphosa’s $100bn target, while it should be encouraged, will be nigh impossible to reach.

Over the past six years, SA managed to attract just shy of $24bn in foreign direct investment (FDI) – less than the average annual target set by Ramaphosa – while outflows totalled nearly $35bn. On a net FDI basis, we’re actually in the red to the tune of $11bn. In fact, SA is one of the world’s top 10 investor economies based on FDI stock (direct investments held abroad), according to the latest World Investment Report, published annually by the UN Conference on Trade and Development (Unctad).

Discounting the Zuma years, we haven’t done much better before. Since 1994, FDI has never reached more than 2% of GDP, as highlighted by an article published in the Helen Suzman Foundation Journal. Ramaphosa’s target equals roughly 8% of GDP, nearly quadruple what SA has been able to attract historically.

Fundamentally, investment comes down to risk and return – investors are unlikely to exploit opportunities unless they believe they will be adequately rewarded for the risk that they take with their money.

Different investors will have different risk appetites, and numbers can be crunched in all sorts of creative ways. But, in short, to attract more investment, SA’s potential risks should be lowered and the potential rewards increased.

On the risk front, political and regulatory uncertainty is most often blamed for the dearth of investment into the South African economy in recent years. The debate on land expropriation without compensation is one example; the cancellation of investment protection agreements with key investment and trading partners is another. But uncertainty is only one piece of the puzzle.

The World Bank has highlighted a diverse set of factors that drive FDI. These include market size and potential; institutional and regulatory quality; trade openness; the quality of infrastructure; economic and political stability; labour quality and costs; and cultural links.

On almost all these counts, SA will have to significantly up its game in order to attract more investment. Our market is small and geographically far removed from major markets; GDP per capita has been going backwards in recent years; government finances have deteriorated rapidly, leading to numerous credit ratings downgrades; any new investor will consider their likely reliance on Eskom before they sign on the dotted line.

Internationally, countries are trying numerous ways to be more attractive to foreign investors, including liberalising entry conditions in industries such as transport, energy and manufacturing, simplifying administrative procedures, providing incentives and creating new special economic zones, according to Unctad.

Some of these measures have paid off for SA, too, notably the renewable energy programme and the incentives for automotive manufacturers. But incentives can quickly turn into a zero-sum game, with the costs outweighing the benefits for the broader economy. Many promises have been made about cutting red tape, and the roll-out of one-stop shops across the country is aimed at making it easier for investors to get the necessary visas, licences and other permits.

These attempts should be encouraged, but it won’t do much to change the fundamentals.

The South African economy remains highly concentrated, dominated by big business, big government and big labour, making it extremely difficult for new entrants — local or foreign, small or large — to gain a foothold. Addressing the underlying structural issues is where the real challenge for Ramaphosa and his team of highly regarded envoys lies.

LET’S KEEP THE CHAMPAGNE ON ICE UNTIL WE SEE THOSE DOLLARS ACTIVELY AT WORK IN SA