Foreign investment inflows pick up

The outflows of foreign capital which SA saw in 2021 turned into modest inflows of about 1% of GDP last year, helping to fund the current account of the balance of payments, which swung into deficit last year after two years of surpluses.

The latest edition of the Reserve Bank quarterly bulletin shows net capital inflows increased to R23.5bn in the fourth quarter of 2022, from R14.6bn in the third quarter, with cumulative flows on the financial accounts of the balance of payments switching to an inflow of R67.9bn (1% of GDP) from an outflow of R244.5bn (3.9% of GDP) in 2021.

Inflows of foreign direct investment outweighed outflows of portfolio investment (in shares and bonds) in the fourth quarter, with foreign direct investment jumping to R67bn in the fourth quarter from R11.9bn in the third quarter. The bulletin does not name the companies, but cites a non-resident parent company in commerce which increased its investment in a domestic subsidiary and a domestic telecommunications company which issued shares to its parent to finance a foreign acquisition, along with other multinationals who granted loans to their SA subsidiaries.

However, for 2022 as a whole inward direct investment decreased substantially from R604bn in 2021 to R145bn in 2022, the bulletin reports.

SA has historically depended more on inflows of foreign portfolio investment  – into JSE listed equities and bonds — to finance deficits on the current account of its balance of payments because it does not receive that much by way of more durable growth boosting foreign direct investment flows.

The current account surpluses in 2020 and 2021 made SA less dependent on foreign capital inflows but is more vulnerable now that the balance of payments current account is back in deficit.

Reserve Bank governor Lesetja Kganyago flagged this as a risk at this week’s monetary policy committee, saying SA’s external financing needs were expected to rise, with the current account deficit forecast to deteriorate to 2.7% of GDP for the next three years because of sharply lower export commodity prices, stable oil prices, and weaker growth in export volumes. This would put pressure on bond yields and the rand, he said.

The current account deficit last year was 0.5% of GDP, compared to the surplus of 3.7% recorded in 2021, when global commodity markets were booming.

The current account comprises the trade account, which reflects SA’s exports and imports, as well as services related flows (such as tourism) and flows of income (such as dividends and interest payments). The fourth quarter saw a significant narrowing of the trade surplus as exports fell faster than imports. But the service and income side of the current account — which is generally in deficit — improved as inbound tourism picked up and the dividend account posted its third surplus in recent history.

joffeh@businesslive.co.za