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The latest AT Kearney Foreign Direct Investment index published yesterday is troubling as there’s no mention of South Africa, indeed, not a single African country makes the Top 25 table. This despite SA having held 11th place as recently as 2011, but it’s been a downhill slide ever since, having fallen off the list completely last year. Biznews’ Alec Hogg referred to the country’s drought of foreign direct investment that is related to domestic reasons, and is worsening. Econometrix’s Rob Jeffrey and Johannes Jordaan dig deeper into this FDI crisis, in search of ways to rectify the current situation. It’s an interesting article that was first published in the latest issue of Africa in Fact – The journal of good governance Africa. The issue looked at FDI in Africa and asked if the continent is open for business? The full report is at the end of the article. – Stuart Lowman
By Rob Jeffrey and Johannes Jordaan
South Africa has so many positive economic growth attributes that it is difficult to believe that it cannot succeed in achieving high economic growth going forward. An assessment of these attributes reveals that it has virtually unlimited natural resource treasures, amongst the richest of any nation in the world.
It has a multitalented multi-ethnic indigenous population with all the necessary skills to manage and exploit these resources. In summary, it has the land, the climate, the flora, the fauna, the mineral resources and the talent to rank amongst the richest nations on the planet.
Yet it is languishing. It is necessary to take a long hard look as to why this is occurring and then to make decisions, correct decisions to execute on the way forward. This article examines the concerns regarding declining investment and in particular foreign direct investment that are holding the country back and recommends the necessary changes that need to be made to reverse these trends. It is a hard critical look but it is an assessment that needs to be made.
FDI Investment flow in Africa
The South African (SA) economy has made great strides since 1994, when apartheid was replaced with a democratic system. One useful measure of this is the country’s Foreign Direct Investment (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 flows into SA decreased 74% to $1.5 billion—
FDI 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. FDI flows into Mozambique were down 21%, in 2015 for example, but still higher compared to South Africa’s at US$3.8 billion and FDI to Nigeria which declined 27% to US$3.4 billion. 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 in 2014 and R68.3 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 compared to the FDI liabilities held by foreign companies in SA companies. It is the first time this has occurred 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.
The UK remains the largest FDI investor in SA according to SARB data. The FDI assets (stocks) held by UK companies in South Africa were 45.6% of the total SA FDI liabilities in 2014. However, this share decreased from 54% in 2009. As against this, companies from the Netherlands held 16.6% of SA FDI liabilities in 2014, an increase from 10.6% in 2009.
Sectoral Investment and growth
Internally, South Africa has seen a dramatic slowdown in key goods- producing sectors in recent years, mainly 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.
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 or from R235 billion in 2009 to R715 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.
Decline in investment interest in Africa and South Africa
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, 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 deconsolidate it, probably below 20%”, according to the Johannesburg daily newspaper, Business Day.
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 South African economy’s sluggish economic growth, 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.
Causes of the slowdown in FDI
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 no exception.
In particular, policy uncertainty generated by the South African government and the resulting poor sector performance are negatively affecting 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.
The role of Bilateral Trade Agreements
Significantly, South Africa has a number of Bilateral Trade Agreements (BITS) set up to foster and encourage trade with selected countries, and give some certainty and protection to future relationships. The Department of Trade and Industry (DTI) in South Africa, in 2009, recommended that the “poorly drafted” European BITS should be restructured and new legislation brought in. As a result, 13 European BITS were effectively terminated. The countries affected included Belgium-Luxembourg, Germany, Switzerland, the Netherlands, Spain, the UK, France, Denmark, Austria, Greece, Italy, Finland and Sweden. The BITS agreement with the UK was cancelled in 2013. The US does not have a BIT with South Africa but were reassured by the European BITS while they were in place.
However, South Africa has other trade agreements. Trade agreements not cancelled were with China, Russia, Cuba, Czech Republic, Iran and others.
The purposes of any such agreement is to:
- Give certainty by being legally binding on SA;
- Encourage FDI through clear rules and harmonisation;
- Create ‘favourable conditions’ for investments and a ‘predictable’ climate;
- Ensure that investments can only be nationalised or expropriated for national purposes;
- Guarantee that compensation is at full market value;
- To certify that the final remedy is international arbitration, on an investor-state basis.
The current proposed investment bill appears to be flawed and short of the above measures and other internationally accepted rules governing trade and investment.
The value of foreign investments
The value of direct and indirect UK investment in South Africa totalled R1650 billion whilst the figure from China is only R75 billion. Some 85% of total direct and indirect investment has come from the West, particularly from the UK, Europe, and the United States of America (US). The equivalent figures for China are approximately 5%. A study of the various global economies reveals that surplus money for investment lies in Western countries whilst the other countries involved in BITS where agreements have not been terminated are generally less developed and would themselves look for FDI.
According to Anthea Jeffery of the Institute of Race Relations (IRR), there are approximately 3600 European Union (EU) and US companies in SA employing approximately 600000 people or more, and therefore supporting some 2.4 million dependents. Clearly, these companies contribute intensively to training, technology transfer, empowerment, etc. The message to governments, businesses and to investors, whatever the SA government’s intention, was clear, South Africa was switching its preference, if not its allegiance Eastward. These companies will certainly be looking at opportunities elsewhere.
The economic outlook
The current economic outlook looks less than promising. Gross Domestic Product (GDP) growth looks set to be less than 2.5% per annum. The rate of investment growth is low. Currently the ratio of fixed investment on economic and social infrastructure to GDP is less than 20% of GDP compared to the National Development Plan (NDP) target of 30%. The Gross Domestic Savings rate is low at approximately 16% of GDP.
The country is running a current account deficit of approximately -4% of GDP. This is a structural problem because of unbalanced growth in the economy. The budget deficit is approximately 4% of GDP or R140 billion with an interest bill of approximately R130 billion and increasing. Without improved economic growth, the government is not going to achieve its three economic and social objectives of reducing inequality, poverty and unemployment and thereby improving the standard of living of all South Africans.
To underline the importance of this it is necessary to set out what has to be achieved. Since 1995, the population has grown from 45 million to 55 million, but unemployment has grown from 3.7 million to 7.7 million. This figure includes the 2.3 million discouraged work-seekers. Since 2008, 1.16 million jobs has been created according to the Quarterly Labour Force Survey (QLFS), however, 775 000 of these jobs were created in the Community and social services sector, of which the larger portion is in government. According to the Quarterly Employment Survey (QES), total government employment was 2.03 million in 2015. This implies that 2.3 out of every 10 people employed are working for the government according to the QES. Jobs in manufacturing, according to the QLFS has decreased by 329 000 between 2008 and 2015.
Unemployment is currently running at over 25%, whilst amongst the young 16 to 24 year olds, it is close to 50%. The current growth rate is less than 1% per annum and it is anticipated that for the period to 2030 a growth rate averaging no better than 2.5% will be possible, unless radical action, including major policy changes, is taken. The NDP has a growth target of 5% per annum. The South African Reserve Bank (SARB) estimates the current growth potential of the SA economy to be no higher than 2.5% under current economic and policy constraints. Assuming a growth rate with policy changes of 4.2% per annum could be achieved as compared to the current estimates of only 2.5%, instead of a real GDP of only R5780 billion being achievable by 2030, the total GDP would increase to approximately R7397 billion. Growth of 2.5% per annum results in employment increasing from the current 15.7 million, by 7 million, to approximately 22.7 million, if using a fixed employment to GDP ratio. A higher growth rate of 4.2% per annum results in employment figures increasing to approximately 29.1 million. However, given the current rigid labour regulations, combined with poor education and the need to increase labour productivity to be competitive in a globalised world, results in the link between employment creation and GDP growth deteriorating. The GDP grew for example by 54% in real terms between 2000 and 2015, but employment grew by only 28%. For the period 2008 to 2015, the GDP grew by 12.4% while employment grew only 7.9%. This implies that the ratio of employees per R1 million GDP decreased from 6.9 in 2000 to 5.7 in 2015.
After assessing the age distribution of the population, according to various estimates, approximately 16 million new entrants will enter the labour market between 2015 and 2030. It is clear that at the lower growth rate of 2.5% only 41% of the new job entrants of 16 million will find employment, assuming the current fixed ratio between employment and GDP. Unemployment will increase from current levels of 7.7 million to 17.2 million. This is an unsustainable number and points the way to higher poverty levels, growing inequality and a significantly lower level in the standard of living for all South Africans. The number of people on social benefits would increase from the current level of 15.7 million to at least 26 million and possibly more. Should a growth rate of 4.2% per annum be achieved, 29.0 million people could be employed. This means that 13.5 million new jobs would be created and 84% of the estimated job entrants would find work. It is inevitable in the longer term that as more people become educated and raise their standard of living, the population growth rate will drop. In the medium term, the country faces a crisis of epic proportions. It is not helped by certain populist politicians asking that the population growth be increased. In the meantime, these figures confirm that the NDP growth rate target of over 5% per annum is a realistic assessment of the economic growth objective required for the country. It also presupposes therefore that this growth and the sectoral growth is structured correctly and there is the necessary growth of infrastructure and skilled workforce to support it.
How can higher growth be created
The question is then is how to reach and increase the country’s growth potential. Whilst global growth is in the process of stabilising and recovering, it is unlikely that it will return to a high growth path in the near future nor are growth levels likely to reach the high levels that existed prior to 2008.
Growth will need to be primarily internally generated and any export aspirations will need to be based on efficiency, productivity and ensuring low and stable cost structures. The past several years has seen an extraordinary deindustrialisation of the country. The goods producing industries which are critical for future development have lagged. This is particularly true of the mining and manufacturing industries. Manufacturing should be a major sector for a country of South Africa’s size and at its stage of development. This is particularly true for a country so rich in the very resources that are necessary to give the country a competitive edge, a comparative advantage in its terms of trade and above all employment, given the high unemployment rates and demographic profile of the country.
Clearly consumer-led growth is out of the question. The country’s domestic consumer growth will be limited by low growth itself. High unemployment, low levels of savings and high levels of debt make this an unlikely source of future sustained growth. Furthermore, the interest rate cycle is in an upward phase. Household budgets will therefore remain under pressure. A second option is to increase exports. However, global growth does not look as if it is going to recover any time soon, particularly in Europe and to a lesser extent the United States of America. Recent growth in Africa is slowing down as a result of slower growth in industrialised economies and also the major markets for its resources namely China and other Eastern countries. Government investment growth is limited because the government itself has constrained funding and it is facing higher interest rates. Realistically speaking, the only source of economic growth in the near future will be a significant increase in domestic investment, and in particular, foreign direct investment for its goods producing industries in particular.
If the country is to turn its economic fortunes around—and hence its ability to deliver the goods and services necessary to build and sustain a decent quality of life to its citizens—a number of drastic economic and policy measure improvements and changes will be necessary. These include:
- 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 mining, manufacturing, agricultural and agricultural processing industries and its primary and downstream industries must be developed.
- The energy policy needs to target economic growth with secure baseload electricity at the lowest possible price.
- South Africa needs to have policies that unite all people rather than divide them.
- It is essential to attract foreign direct investment, encourage immigration of skills and reduce emigration thereof.
- Have labour, investment, skills and purchasing policies, which foster efficiency and economic growth, above all other considerations.
- Privatising many of the country’s state assets, which are performing inadequately, and ensuring genuine control is handed over to the private sector.
There are signs that government and business have recognised their joint responsibilities and the importance of working together to achieve the necessary changes. However, these efforts are sporadic and being greatly compromised by the fact that the various arms and departments of government favour policies that are in conflict with the economic objectives of the country. The recent proposed Mining Charter affecting investments and shareholdings in the mining industry is a clear case in point and will detrimentally affect investment not only in in the mining industry but also manufacturing and other important sectors of the economy. At the other extreme, the country is blessed with some extraordinary capable institutions that stand out and must be recognised for the success stories they are and examples of what this extraordinary country is capable of achieving. Examples include:
- The South African Reserve Bank, which maintains the country’s currency and financial stability and credibility;
- The National Treasury, which is responsible for the financial management of government and the budget;
- South African Revenue Service is the efficient tax-collecting agency of the country responsible collecting revenue and ensuring compliance with the tax laws;
- The judiciary which is recognised which gives legal stability to the country and maintains its independence;
- An excellent constitution supported by a constitutional court. Recent rulings demonstrate that it is independent and can be relied upon to uphold the constitution;
- The banking system and many businesses rank amongst the finest in the world
These are the pillars of economic development and serve as wonderful examples of the potential. The country, in government, in its institutions and in business has the talent, skills and leadership capable of building the future. However many policies that are enacted are in real conflict with the goals. They often detract from the excellent work being done by other government institutions, restrict skills, foster inefficiencies, discourage investment, encourage emigration. Many policies are well intentioned but are defeating the very essence of future economic growth and development in South African. The recommendations are essential if the potential is to be achieved. For this to occur, it is necessary that all parties could recognise that high economic growth is the fastest and best way of resolving all the economic and social problems in the country. It is the best and in effect the only way of sustainably reducing inequality and unemployment and raising the standard of living. It is time for a clear vision, strong leadership and a common goal to drive South Africa forward in its development.
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. South Africa is looking to enter a dark tunnel of failure with no light at the end unless policies are radically changed. Indeed the statistics on growth and unemployment suggest that we are heading towards a political and social revolution like that which has occurred in the Arab states and in Venezuela unless policies are changed radically and quickly. Such a fate awaits South Africa unless its political leadership takes cognisance of the real problems and their solutions.
Policy change leading to economic growth, reindustrialisation and employment growth are the keys to South Africa’s future economic, social and political prosperity, sustainability, stability and individual economic freedom. For this to occur, it is essential that government, business, trade unions and the people of South Africa recognise their obligations and work towards the common economic and social goal of making this process a success.
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