Red tape and state regulation strangle fixed investment — Investec
Investec, the specialist bank and wealth manager with operations in SA and the UK, has warned that state regulation and red tape in approvals for initiatives to end load-shedding — as well as its inability to resolve freight bottlenecks — will continue to hamper the country’s fixed investment.
SA needs investment for strong and sustainable economic growth. Fixed investment also leads to job creation and helps alleviate poverty.
The Reserve Bank says the private sector accounts for more than 70% of new fixed investment in the economy, stateowned companies are at 11% and the government 18%.
Structural issues, particularly the underperformance of Eskom and Transnet, and the complexity and proliferation of state regulation, are key constraints on economic growth, causing weak business confidence, said Investec chief economist Annabel Bishop In a research note.
She warned that the pace of delivery to end load-shedding by calibrating structural reforms seems to be plateauing, mainly due to “delays in regulatory and other state-controlled approvals, as well as the state’s slippage on the implementation of strategic plans”. After the election the ANC-led government may have to form a coalition with the EFF, whose Marxist-socialist stance worries investors, she wrote.
This coalition may force the ANC deeper into “left-wing” policies, which may lead the government to impose more state regulation and controls.
“Ahead of the 2024 national elections, government is not expected to increase taxes or cut social expenditure due to the negative effects on its support base, but without expenditure cuts, projected borrowings rise, elevating country borrowing costs,” Bishop said.
“The outcome of the election would have a negative effect on business confidence, economic growth and infrastructure investment, resulting in higher unemployment and disinvestment should government become increasingly left-leaning under an ANC-EFF coalition.”
Bishop said the Treasury, in the budget speech on February 21, is expected to set R50bn aside to bail out Transnet, which will elevate debt costs, with the funds coming from the state’s fixed-investment projects.
According to Nedbank, gross fixed capital formation dropped 3.4% quarter on quarter after seven quarters of expansion in a row, driven mainly by investment in renewable energy.
Nedbank senior economist Johannes Khosa said the decline in capital spending was not entirely surprising given the hostile underlying economic environment, with rising input costs and persistent loadshedding weighing on business confidence.
“Investment spending by the private sector fell by 3.1% from growth of 5.4%. Capital outlays by public corporations dropped by 4.1%, reversing from 4.2% growth in quarter two following eight straight quarters of expansion,” he said.
Khosa added that capital spending by the government also contracted, with the slump intensifying to 4.5% from 2.9%, probably reflecting the government’s plan to reduce spending amid declining revenue.
Nedbank economist Crystal Huntley said the intensification of load-shedding in the third quarter of 2023 led to a GDP contraction of 0.2% quarter on quarter.
Huntley said the operational failures at Transnet also worsened significantly, delaying cargo processing, with congestion surcharges adding further pressure in December.
“The power outages and Transnet’s inefficiencies will continue to disrupt output, inflate operating costs and erode profitability across all industries,” she said.
Bishop said that with the government and private sector’s collective goal of ending load-shedding in the foreseeable future, the state should revisit several important pieces of legislation, such as the Integrated Resource Plan 2023, which pushes increased fossil fuel usage and less renewable power compared with the 2019 version.
She said collaboration between the government and business on energy, transport and logistics, as well as crime and corruption, has resulted in adding 1,600MW of power generation capacity, edging SA closer to ending load-shedding.