Investment summit a confidence booster, but caution is needed
Pledges from companies are not guarantees and some are needed to keep the economy going, though experts say the event was well worth the effort
The neon-lit auditorium where President Cyril Ramaphosa s recent investment conference was held and where business leaders from all over leant into the reflected glory of the Springboks’ World Cup win and promised to invest in SA is worlds away from the stream of depressing economic data published in its wake.
Business confidence levels have barely crawled back from 20-year lows, and the Reserve Bank’s leading indicator suggests growth in the next 12 months will not improve dramatically. High-frequency data for manufacturing, mining and the retail sector in recent weeks have all underwhelmed.
Business confidence levels are a good indicator of investment in the economy, so how do we reconcile negative confidence levels for 20 quarters in a row with the headline-grabbing R363bn in new investment pledges that came out of the summit?
“We need to try and have a little bit of healthy cynicism with these numbers,” says Sanisha Packirisamy, an economist at Momentum Investments. The economy’s performance, despite the pledges of the 2018 conference, suggested that the investments made were “already in the plan”, she says.
“It wasn’t necessarily above and beyond what many of the companies would have spent.”
Stanlib chief economist Kevin Lings puts the R363bn of investments announced at the 2019 summit into perspective. Fixed investment into the economy by the private sector totalled R620bn between mid2018 and mid-2019, according to Lings. At the same time economic growth is expected to grow at only 0.5% this year, while unemployment has risen to nearly 30%.
“The answer is that a vast majority of this investment spending is undertaken to simply maintain existing productive capacity,” says Lings. Though the total spending on fixed investment or spending on machinery and equipment, computer networks, locomotives, airports, water treatment plants and power stations sounds impressive, it is spending that is needed just to keep the economy functioning. It is not going to increase capacity or create jobs, Lings points out.
He says real fixed investment over the past five years has averaged 1.2% a year. Private sector fixed investment represented only 12.5% of GDP in the past year, while fixed investment by the government represented 5.4%.
This is well below the 20% of GDP level recommended in the National Development Plan, Lings says.
“That does not mean it’s unimportant; it does not mean it’s a failed [effort].” Even if all it does is get companies spending more on maintenance and the announcement of one or two projects, “it’s worth the effort”.
One of the companies that pledged R4.7bn at the 2019 summit is listed property firm Growthpoint.
“There isn’t better capital investment than our industry, because it is fixed capital formation ... you cannot remove that,” says Growthpoint CEO for SA Estienne de Klerk.
About half of the projects pledged by Growthpoint had been decided on, or begun, in 2018, the rest in 2019. And while three are refurbishments of office parks or malls, the rest of the investments are “brand new capital”, says De Klerk.
Not only are these properties channelling money into tangible assets, he says, increasingly they include the construction of municipal infrastructure, as local governments battle to provide services.
“So this kind of investment is what SA needs much more of. But unfortunately the economy does, to some extent, dictate what is possible,” says De Klerk.
What has improved over the past year is foreign direct investment (FDI), says Momentum’s Packirisamy. In the five years preceding 2018 SA has experienced an FDI “strike”, she says.
SA suffered a steep fall in FDI inflows 2014 but recovered in 2018, according to the UN Conference on Trade and Development. Inflows rose to $7.1bn (R104bn) in 2018 compared with $1.3bn in 2017, or about 446%, during a time when FDI shrank globally.
In 2019, 28 of the pledges came from overseas. They included a group of French companies — such as oil giant Total and transport company Alstom — facilitated through the French SA Chamber of Commerce, which pledged R20bn. According to the chamber, the majority of these pledges are for new investments over the coming five years, which will create an additional 3,000 jobs.
Caution over the promised numbers at the summit notwithstanding, the event helps to build positive global sentiment, Packirisamy said, and it is “one step forward to generating domestic confidence”.
But the pledges from companies remain promises, not commitments, says Wayne McCurrie, portfolio manager at FNB Wealth and Investments.
“If the economy gets worse, if the politics gets worse, they won’t do it,” he says. “Whatever is spent will be spent on a commercial basis.”
But he too contends that the conference should not be dismissed as a talkshop.
“One of the biggest things lacking in SA is faith. There is such a deficit of trust, what we really need is a change in sentiment and a change in the dialogue,” he says.
The summit counters the “onslaught of negative sentiment”, provides motivation and “highlights that subject to many conditions people are prepared to invest in SA, because they do see a future that is better”.