South Africa: policy failure

Africa’s most sophisticated economy faces global headwinds, but problematic governance compounds its challenges

By Rob Jeffrey and Johannes Jordaan

The South African economy has made great strides since 1994, when apartheid was replaced with a democratic system. One useful measure of this is the country’s FDI liabilities—FDI stock held by foreign companies in the country. In 1996, these were $14.4 billion in nominal terms, but by 2015, they were $148 billion, having reached a high of $179 billion in 2011. However, the tide of FDI to South Africa is turning. In 2015, world FDI flows increased an estimated 36.5% to $1.7 trillion, according to the United Nations Conference on Trade and Development (UNCTAD). Meanwhile, FDI flows to Africa decreased 31.4% to $38 billion in the same year, and FDI flows into South Africa decreased 74% to $1.5 billion. Data from the SA Reserve Bank (SARB) shows that FDI to South Africa reached a record level of R80.1 billion ($8.3 billion) in 2013 and was still high at R62.6 billion ($5.78 billion) in 2014, but that it dropped to R22.6 billion ($1.77 billion) in 2015. FDI flows tend to be volatile, but the 2015 level is the lowest level in nominal terms since 2006.

According to UNCTAD, the large decline in FDI to African countries is due to the recent end of the commodity “super-cycle”, which has seriously affected the flow of FDI to resource-rich countries. In 2015, FDI flows into Mozambique were down 21% to $3.8 billion while FDI to Nigeria declined 27% to US$3.4 billion, for example. However, both of these figures were higher than South Africa’s FDI of $1.5 billion in the same year. (UNCTAD preliminary data for 2015. Differences in value with respect to the previous paragraph may be due to different definitions of FDI used by SARB and UNCTAD.) Meanwhile, South African companies are increasingly investing elsewhere. According to SARB data, South African FDI flows into the rest of the world were R83.2 billion ($7.7 billion) in 2014 and R68.3 billion ($5.4 billion) in 2015. This demonstrates the entrepreneurial qualities inherent in South African business, but it is also an indication of a lack of confidence in the domestic economy.

In 2014, South African companies held more foreign FDI assets as compared to the FDI liabilities held by foreign companies in South African companies. It was the first time we have seen this since 1998. The sharp decline in FDI to South Africa is highlighted by its performance on the AT Kearney FDI Confidence index. While the country occupied the 11th position out of the top 25 rated countries in 2012, it dropped to the 13th position in 2014. More ominously, it was not included in the 2015 ranking at all. According to the 2015 EY Africa Attractiveness survey, FDI flows into new green- and brown-fields projects in South Africa declined in 2015, for a second consecutive year. Internally, South Africa has seen a dramatic slowdown in key goods producing sectors in recent years, mainly in agriculture and agricultural processing and in the mining and manufacturing sectors.

Following the global recession of 2008/9, many of the country’s economic sectors faced sharply reduced domestic and export demand levels. Key sectors of the economy have also seen longer-term declines. Manufacturing contributed about 30% of GDP in 1986, but that share is currently at about 21%. The share of mining fell from 13% to 7% in the same period. Meanwhile, services have grown from 51% to 69% of GDP. The UK remains the largest FDI investor in South Africa, according to SARB data. The FDI assets (stocks) held by UK companies in South Africa were 45.6% of the total South African FDI liabilities in 2014. However, this share decreased from 54% in 2009. As against this, companies from the Netherlands held 16.6% of South African FDI liabilities in 2014, an increase from 10.6% in 2009. In another development, foreign investors are changing their interest in South Africa, with more emphasis on the service industry and less on value-added industries such as mining and manufacturing.

FDI liabilities in manufacturing decreased from a share of 27.9% in 2009 to 16.5% in 2014. However, the FDI share in finance, insurance, real-estate and business services increased from 27.1% in 2009 to 44.4% in 2014 from R235 billion ($27.8 billion) in 2009 to R715 billion ($65.9 billion) in 2014 (in nominal terms). FDI liabilities in mining and quarrying accounted for 33.4% of total FDI liabilities in South Africa in 2009, but dropped to 23.5% in 2014. The increased share in the service sector was mainly driven by foreign investment in South African banking. This could change, depending on who buys the Barclays share in Barclays Africa Group. In early April this year, London-based Barclays plc confirmed its plans “to sell down its 62% stake in Barclays Africa (Absa) over the next two to three years, to a level at which it can de-consolidate it, probably below 20%”, according to the Johannesburg daily newspaper, Business Day.

One contributing factor to the lower inflow of FDI to South Africa in 2015 was the sale by UK pharmaceutical giant GlaxoSmithKline of half of its 12.4% stake in South African drugs manufacturer Aspen Pharmacare for R10.5 billion ($823.5m). Steinhoff bought control of Pepkor, a South African holding company with extensive interests in retail, from South African business tycoon Christo Wiese and Brait, an investment company with South African roots but a primary listing in Luxembourg. The deal also involved Brait Mauritius, which was holding Brait’s 37% of Pepkor, and “therefore counted as a foreign investor disinvesting from a South African asset for balance of payments purposes,” according to the Rand Daily Mail, a South African website. These deals resulted in a net FDI inflow of -R13.9 billion (-$1.09 billion) in the first quarter of 2015, but this was followed-up with positive net inflows of R6.9 billion ($541.2m), R15.9 billion (1.25 billion) and R13.7 billion ($1.07 billion) in quarters two, three and four respectively, according to SARB data.

Nevertheless, the recent sharp decline in FDI to the country is clear evidence that foreign investors are losing confidence in the South African economy. Given the sluggish growth of the South African economy, investors were looking elsewhere, according to the 2015 EY investment attractiveness report. Significant investment from other countries, notably the Brics grouping, which consists of Brazil, Russia, China and India, as well as South Africa, has not been forthcoming. These countries are also facing economic challenges caused by the global economic slowdown and the fall in prices of commodities. South Africa’s economic performance has certainly been influenced by low commodity prices, but the end of the commodity super-cycle tells only part of the story. Resource-rich countries, particularly in Africa, have generally failed to develop much-needed infrastructure and to develop their potential downstream supply and other industries.

They have also suffered the twin scourges of corruption and poor policymaking. Sadly, South Africa is now no exception. In particular, policy uncertainty generated by the South African government and the resulting poor sector performance are negatively shaping the situation. As in other African countries, government policy decisions are impeding economic growth and discouraging foreign investment—particularly from Western industrialised countries, traditionally the major source of FDI to the country. Without improved economic growth, the country’s domestic consumer growth will be limited. Currently, South African households are in serious debt. Government investment growth is limited because the government is short of funding. Realistically speaking, the only source of growth in the near future will be a significant increase in domestic investment, and in particular, foreign direct investment.

If the country is to turn its economic fortunes around—and hence its ability to deliver services and a decent quality of life to its citizens—a number of measures will be necessary.

• Restrictive legislation that leads to inefficiencies and low productivity must be withdrawn.

• Legislation that promotes both domestic and foreign investment must be encouraged, rather than discouraged.

• The country’s infrastructure must be enhanced to support growth.

• South Africa’s goods-producing primary and downstream industries must be developed.

• Many of the country’s state assets, which are performing inadequately, must be privatised, and control handed to the private sector.

Individual freedom and true economic independence will only come by focusing on those factors that increase economic growth. Countries that do not participate in the process of globalisation, or which introduce inferior or inadequate policies as compared to those of developed or other developing countries, run the risk of becoming comparatively less competitive in the global economy. Such a fate awaits South Africa, unless its political leadership wakes up.

Robert Jeffrey is managing director and a senior economist at Econometrix, specialising in the energy, mining and the electrical sectors. A graduate of the University of the Witwatersrand and of the University of Cambridge, he has forty years’ experience in project consulting. Johannes Jordaan is an associate econometrician at Econometrix. He holds a PhD in Economics from the University of Pretoria. He was a senior economist and manager at KPMG until 2009 and is currently also a part-time research fellow at UNISA.

Robert Jeffrey is managing director and a senior economist at Econometrix, specialising in the energy, mining and the electrical sectors. A graduate of the University of the Witwatersrand and of the University of Cambridge, he has forty years’ experience in project consulting. Johannes Jordaan is an associate econometrician at Econometrix. He holds a PhD in Economics from the University of Pretoria. He was a senior economist and manager at KPMG until 2009 and is currently also a part-time research fellow at UNISA.