SA records sharp drop in foreign direct investment
Declining inflows are a major blow as the economy was already struggling before the pandemic, but commence of the AfCTFA is seen as positive
Foreign direct investment (FDI) in SA plunged 15% to $4.6bn (R79bn) in 2019 and is expected to drop further this year due to the Covid-19 pandemic, according to a new global investment report by the UN.
Global FDI flows are forecast to decrease by up to 40% in 2020, from their 2019 value of $1.54-trillion. This would bring FDI below $1-trillion for the first time since 2005, the report stated.
Declining investment flows will be a major blow for SA, which has been battling to revive the ailing economy worsened by the health crisis. In 2018, President Cyril Ramaphosa set a target to lure investments of $100bn by 2023 in an attempt to re-ignite economic growth, which has been falling far short of the 5.4% annual target set in the National Development Plan, the government’s blueprint for eliminating poverty and reducing inequality.
According to the UN report, FDI flows to Africa in 2019 declined by 10% to $45bn. Increased FDI flows to some of the continent’s major economies, including Egypt, were offset by reductions in others, such as Nigeria and SA.
The pandemic will severely curtail foreign investment in Africa in 2020, mirroring the global trend. The downturn will be further exacerbated by the extremely low oil prices, considering the resource-orientated investment profile of the continent. FDI inflows are expected to decline between 25% and 40%.
Due to the widespread economic uncertainty and restrictions in movement, many announced and planned investment projects are likely to be either shelved or put on hold, according to the report. As of April 2020, the number of cross-border mergers and acquisitions targeting Africa had declined 72% from the monthly average of 2019.
The report highlights that the economic and investment implications of the pandemic for FDI will be further compounded by the oil glut in global markets, which is causing extremely low oil prices as well as declining commodity prices in general. A large part of FDI to Africa is resource-seeking, with 40% of all greenfield project announcements in 2019 targeting industries directly linked to natural resources.
“Depending on the duration and severity of the global crisis, the longer-term outlook for FDI in Africa could draw some strength from the implementation of the African Continental Free Trade Area agreement (AfCTFA) in 2020, including the conclusion of its investment protocol,” the report stated.
In addition, investment initiatives for Africa by major developed and emerging economies could help the recovery.
The expected commencement of trading under the AfCTFA in 2020 could also provide support for FDI on the continent. According to the UN report, the formal implementation of the treaty after years of deliberation could offer a cushion against the negative economic and investment impacts of the pandemic and low oil prices in the medium to long run.
Intra-continental investment, in particular, could receive a positive stimulus, especially after the finalisation of the investment protocol in the second phase of the negotiations, which are scheduled for December 2020.
Seen together, the report said, the growth of state-backed investment initiatives and the implementation of the AfCTFA indicate that the investment downturn in Africa could be mitigated in 2021 and beyond — though both could both run into temporary delays.