Slowing FDI raises ante for election outcome
Cyril under pressure as looming showdown puts SA in spotlight
● As South African voters prepare to head to the polls in two weeks’ time, an investment go-slow is not showing any signs of dissipating, reflecting anxiety about the makeup of the new cabinet after the elections.
And the numbers tell the story.
Inbound foreign direct investment during the first quarter of this year is close to its lowest level in five years, with only 19 deals recorded compared to 35 in the three months to March last year.
The total value of the deals has dropped from $595.5m (R8.65bn) in the first quarter last year to $438.7m for the same period this year, data from global investment consulting firm Refinitiv shows.
Business and consumer confidence surged last year as President Cyril Ramaphosa sought to root out corruption and restore credibility to key institutions, but sentiment has soured since.
Foreign direct investment flows into SA are volatile.
In the first quarter of 2007, $4.39bn flowed into SA as China’s thirst for commodities seemed insatiable, but inflows slumped in the following year before rising in 2009. Following another slump in 2010, the value of deals in the first quarter of 2011 was $1.36bn.
Consumer staples
Since 2011, investment in the first quarter has not breached $1bn as the commodities boom tapered off. This has also been a reflection of tougher global financial times.
Now, at a time when economists are revising SA’s economic growth to about 1% after electricity supply challenges between January and March this year, investment expansion is riding on the results of elections that will have to lead to investor-friendly outcomes in the near term.
Lumkile Mondi, a senior economics lecturer at Wits University, said many people in the investor community were rooting for Ramaphosa because they perceive the ANC to have much broader support among the black population than other political parties.
There are huge expectations for Ramaphosa in these elections because he comes from business, he said.
He understands the risks embedded in the South African economy and the exposure that many people, like him when he was in business, are facing, said Mondi.
“He will therefore elect a team that will put SA back where it belongs by implementing business-friendly policies so that business can get on with what it does best.”
Franita Neuville, an investment and advisory manager at Refinitiv, said: “We could see subdued investment activities in SA in the second quarter of 2019 because of the elections taking place on May 8.
“Companies might rather opt to adopt a ‘wait and see’ approach, withholding big investments into SA until [after the] elections.”
Neuville said that, globally, countries and companies had become more inward focused, with political instability growing across the globe and companies “choosing to take a risk-off approach and holding on to their capital for now”.
This is reflected in the quality of foreign direct investment that has flowed into SA.
In the past quarter, the highest volumes of inflow have been into the consumer staples sector, followed by industrials, energy and power, financial services and health care. Only $1m has been invested in the critical telecommunications industry.
Decoupled
Sectors such as consumer products and services, media and entertainment, high technology, real estate and retail have received no foreign direct investment so far this year, according to Refinitiv data.
And the investment that has flowed in has not been to establish new ventures but has come into existing firms, which means it will most likely not significantly raise the prospect of more jobs.
This underscores the importance of the investment pledges made at the presidential investment summit in October last year materialising.
Duncan Pieterse, the National Treasury’s head of economic policy, said that of the R290bn committed, about R187bn was in the implementation phase with the rest in the pre-implementation stage.
“The idea of the investment conference was precisely because there is an acknowledgement that the reason we’ve had slow growth for so long, and the reason why, in some ways, we’ve decoupled from the global economy, is that we’ve seen lacklustre growth in investment.”
Pieterse said that in some sectors, such as mining, there was not enough investment to cover depreciation.
“We are concerned for what it means for potential growth but it also reflects the demand conditions, and, to the extent that some of those firms are exposed to the continent or globally, it affects what they think is happening globally as well.”
He added: “You need a significant shift in private investment, which accounts for about 60% of total investment in the South African economy, in order for you to make some inroads there.”
Several key sectors have received no foreign direct investment so far this year