Africa-Press – South-Africa. South Africa’s political environment remains a significant constraint on private sector investment, with companies hesitant to commit capital to new projects or expand their operations.
Coupled with a stagnant economy, businesses have preferred to accumulate cash reserves rather than invest in South Africa.
This has resulted in corporates having R1.8 trillion in cash sitting in call accounts or money market funds, waiting on the sidelines to deploy when conditions improve.
In 2024, companies added R186.1 billion to this pile, the largest annual increase ever recorded, as they became increasingly uncertain about South Africa’s future.
Coronation’s economics unit recently conducted a study of South Africa’s unemployment crisis and its root causes, with declining investment being one of the key reasons.
The asset manager explained that there is a close link between increased fixed investment in equipment, machinery, and infrastructure, and economic growth.
It also found that there is a strong inverse relationship between the perceived political constraint in South Africa and fixed investment from companies.
As the political environment is perceived to be more uncertain and less conducive to private businesses, and regulations become more onerous, private investment declines.
From 1994 to 2008, South Africa’s total capital investment ramped up steadily to reach a peak of 23.3% of GDP at the end of 2008.
Over the period, there was steady growth across all economic sectors, but the private sector accounted for almost 16% of the total.
Coronation said that since the peak, there has been a steady decline in private sector investment in South Africa, with it slowing to below 10%.
The only time this picture of decline changed was when peak load-shedding resulted in generation restrictions on private energy projects being lifted.
This resuscitated private investment to an extent, with the momentum since moderating as projects came online and load-shedding became a thing of the past.
Coronation said a deterioration in the political environment from 2012 onwards has contributed to weaker business confidence and a reluctance to invest.
This can be seen in the graph below, with the political constraint index shown on an inverse scale on the right hand side.
Crisis of confidence
The main limitation on South Africa’s economic growth has been a lack of fixed capital formation, with the private sector being the largest contributor.
In its latest Quarterly Bulletin, the Reserve Bank’s data showed that the private sector’s share of total gross fixed capital formation edged up to 73.7%.
Thus, with private businesses unwilling to invest heavily in the local economy, it is unlikely to grow at a sustainably faster rate.
South Africa’s small amount of economic growth is largely driven by consumer spending, which is too narrow and fragile to drive a sustained recovery.
This is because it is based on short-term cyclical factors, such as low inflation and interest rates, as well as early withdrawals from retirement savings.
The difficulty lies in creating an environment where companies are willing to take cash out of money market funds or call accounts and invest it in growing their operations.
Stanlib chief economist Kevin Lings explained that the current investment climate is made up of maintenance capex, with companies treading water and waiting for a better environment.
“We would have to up the investment considerably more to result in capacity building or job creation in South Africa,” Lings said.
“Instead of deploying capital into growth or hiring, corporates are parking it in money market funds or call accounts.”
To get this capital off the sidelines and invested in the economy, the government has to create an enabling environment for companies. This begins with deregulation.
“I would say that deregulation is your only option now. It is your only choice, and while you may not like it ideologically, it is your only option,” Lings said.
“You are out of options, and those options have been taken away because you took government debt from 26% to 76% of GDP. That increase meant you have taken away your option to use your own balance sheet.”
For Lings, tapping into private capital in South Africa is a far better alternative than looking towards international lenders such as the World Bank and the International Monetary Fund.
“Your only options are international agencies. Or, talk to the local private sector and ask them under what conditions they would begin to invest in local industry,” Lings said.
“That is happening. That discussion is happening, and it turns out that companies and asset managers are interested.”
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