INSTITUTE FOR INTERNATIONAL FINANCE
Uncertainties in SA ‘may curb capital inflows’
SA is likely to see a slight decline in foreign capital inflows in 2017, with confidence remaining weak and foreigners not likely to commit to significant investment in the country in the present uncertain economic and political environment.
This is the word from the Institute for International Finance (IIF), which forecasts capital inflows of $10.9bn in 2017 compared with $12.4bn in 2016. In its latest quarterly report, the IIF predicts that capital inflows to emerging markets will be hardly higher than 2016, which saw emerging market inflows bounce back from a 12-year low in 2015, and it cautions that the "Trumpstorm" has increased the risks, particularly to foreign direct investment
The IIF warns that investors will be much more discerning about emerging markets this year and that the quality of institutions matters for capital flows in an environment of political uncertainty.
SA relies on sizeable inflows of foreign capital to finance the deficit on the current account of its balance of payments, which ratings agency Moody’s forecasts will edge up to 4% of GDP in 2017 after falling to 3.9% last year, from 4.3% in 2015.
"A smaller current account deficit has relieved pressure on the balance of payments and we expect further improvement in 2017 due to the rally in the price of metals and minerals," chief economist David Hedley said in the IIF’s report on Thursday.
"Plenty of dangers lurk, however, not least of which will be growing political tensions leading up to the ANC leadership election late in 2017."
Hedley said the ratings agencies’ decision not to downgrade SA had calmed markets, but this might be only a temporary respite as they expect progress on fiscal consolidation and reforms to spur growth before the next review. The growing expectation that Finance Minister Pravin Gordhan would remain in place had also reassured investors.
He said Gordhan’s budget later in February would be scrutinised by investors for any sign of fiscal slippage.
The IIF expects inflows to emerging markets of $680bn in 2017, well below the $1-trillion plus inflows in 2010-14. It notes that capital inflows have been declining as a share of emerging market GDP so are playing a declining role in supporting growth in these economies.
Foreign direct investment inflows — as opposed to portfolio inflows into bond and equity markets — declined in 2016 and the IIF sees a post-crisis low in foreign direct investment flows to emerging markets this year, against the backdrop of
new proposed US policy initiatives such as import taxes and discouraging offshoring by US corporations.
Emerging markets also see outflows of capital of almost
$1-trillion in 2017, in part reflecting heightened political and financial risk in several emerging markets.