Uptick in private investment could be thwarted by a weak economy and power woes
Private sector investment — which has seen unexpected double digit increases in recent months — is unlikely to be sustained as growth lags and power cuts bite
Continued power cuts, depressed business confidence and uncertainty over the government’s weak fiscal position could weigh down a recent turnaround in private sector investment in SA’s embattled economy.
According to data from the SA Reserve Bank’s most recent quarterly bulletin, fixed investment by the private sector rose in the second and third quarters of the year by 15.8% and 10.8% respectively.
Fixed investment is important for boosting growth and creating jobs in an economy where unemployment is just shy of 30%. It has been a clarion call of President Cyril Ramaphosa’s administration, which wants to attract $100bn in investment by 2023.
The “substantial rebound”, in investment from private businesses has helped drive increases in gross fixed capital formation, one of the few bright spots seen in recent GDP data, which revealed that the economy has shrunk by 0.6% in the three months ending in September.
Gross fixed capital formation — a measure of investment in the economy — rose by 5.8% and 4.5% in the past two quarters and comes after five consecutive quarters of decline.
The private sector’s share of gross fixed capital formation rose from 63.9% in 2015 to 70.9% in third quarter of 2019, according to the Bank’s figures.
The increase in private sector investment — due to increased spending on machinery and transport equipment — contrasts with flat investment by state-owned companies, and continued double-digit declines in investment by general government.
Capital expenditure by general government shrank 17.8% in the third quarter and 16.3% in the second quarter — making seven consecutive quarters of contraction.
So there are all of these things arguing or suggesting that if you do see an uptick it will be nothing more than that.Nicky Weimar
“The potential for a sustained recovery in private sector fixed investment in 2019 is likely to have been undermined by depressed business confidence that in turn is affected by perceived slow progress on structural reforms, weakened governance, elevated policy uncertainty and electricity supply shortages,” Investec economist Kamilla Kaplan said in a research note.
“Weak economic activity and the attendant excess capacity experienced by many businesses also diminishes fixed investment intentions.”
Other economic data is pointing to a depressing start for the fourth quarter of the year.
The Bank’s most recent leading business cycle indicator for the month of October declined 1.7% on an annual basis. This is the thirteenth month of consecutive declines on an annual basis.
The indicator offers a projection of SA’s economic growth cycle for the next six to 12 months, by measuring changes in a range of components over time, including the number of approved building plans, job advertisement space, manufacturing order volumes and passenger vehicles sold.
The increases in private sector investment, though positive, have come off a long period of declines, “so it’s not something to shout about yet”, Nedbank senior economist Nicky Weimar told Business Day.
The figures were surprising given the country’s “broad fundamentals” were not supportive of increased investment, she said.
The continued bouts of load-shedding were “an incredible cloud” hanging over the country’s prospects for growth, said Weimar.
Uncertainty over fiscal policy, the government’s rising debt burden and the possibility of increased taxes to stabilise its weak financial position all pointed to increasing risks in 2020, she said.
“So there are all of these things arguing or suggesting that if you do see an uptick it will be nothing more than that,” Weimar said.
The investments made by the private sector were mainly in spending on transport equipment, machinery and equipment and on computers and related equipment, she said.
“So what it appears to be is modernisation,” said Weimar.
Instead of investing in expanding their productive capacity, companies appeared to be investing in improving the efficiency of their existing businesses, she said.
This type of fixed investment “does not create the type of jobs that we need, for that we need to actually expand our capacity,” said Weimar.