Despite Cyril Ramaphosa’s best efforts, the new dawn has not yet arrived
The initial investment must be domestically generated before we see foreign direct investment
Following President Cyril Ramaphosa’s pronouncement of a "new dawn" when he ascended to the Union Buildings early this year, economic growth expectations went as high as 2.3% for 2018. This was reinforced by the commitment to deal with corruption and clean up the maladministration in state-owned enterprises (SOEs) — in which we saw board changes and management shakeups at no less than five of them.
We have also seen the establishment of the Youth Employment Services (YES), and the announcement of an investment summit and a jobs summit, which are due to take place before the end of 2018.
Announcing a 2.2% contraction in economic growth for the first quarter of 2018 (seasonally adjusted and annualised), Statistics SA has confirmed that the changes to date represent good progress, but are not enough to turn optimism into real economic activity. Incoming economic data for the second quarter of the year is encouraging but it remains weak. Consequently, growth forecasts have been revised down: the Bloomberg consensus forecast is now at 1.5% from 1.7%, the South African Reserve Bank has 1.2% from 1.7%, while the International Monetary Fund (IMF) kept its forecast steady at 1.5%.
In addition, global growth has peaked, but is still above trend and is now less synchronised with the downside risks emerging. The weaker-than-expected local growth, combined with these emerging downside risks globally, means that the new dawn is not yet definitive.
$100bn investment drive could be a game changer
It would seem Ramaphosa anticipated this and struck a good note with investors with his ambitious goal of attracting $100bn over the next five years, from foreign direct investment (FDI) as well as local investment.
Data from the Global Infrastructure Hub confirms SA’s investment gap at $100bn. Given the employment challenges and the low-growth trap SA finds itself in, it is critical to achieve this investment goal. Our analysis suggests that a $100bn FDI into the country would lift GDP growth to 4% a year, while employment would grow by a minimum of 2% a year, which translates into 2-million jobs over five years. This is a game changing ambition.
To date, about $35bn in investment has been pledged — $10bn each from Saudi Arabia and the United Arab Emirates — earmarked for energy and power generation, and the tourism and mining sectors. The remaining $15bn, from China, was announced on the sidelines of the recently held Brics summit.
It is a notable vote of confidence in the Ramaphosa administration that within six months in office and before the investment summit has taken place (which is meant to be the main drawcard), $35bn has already been committed. Well done to the president and his investment envoys.
Good for ordinary workers
In addition to creating new job opportunities for all South Africans, higher GDP growth can improve investment outcomes for ordinary South Africans. Our data shows that only 6% of South Africans retire comfortably. Even after stellar inflation-adjusted returns in listed financial markets from a long-term perspective, pension fund investors’ financial well-being has not improved. Returns from traditional asset classes have not been able to match the objectives of retirement income needs.
Attracting FDI — which mainly flows into roads, energy, ports, airports, rail, technology and water — also improves the investment returns from unlisted investments in the alternatives space. Improved financial outcomes are best achieved from a diversified source of returns. Ramaphosa’s investment drive is improving the likelihood of better risk-adjusted returns from alternative asset classes, thus improving the financial well-being of South Africans who are invested in these assets
Don’t count the chickens before they hatch
While the investment commitments to date represent great progress, caution is prudent. First, commitments, especially from government to government, do not necessarily imply actual investment. A case in point is Ramaphosa informing his Russian counterpart that SA cannot afford nuclear at this point. So, until the FDI flows into SA, commitments remain commitments.
Secondly, without convincing South African investors to have confidence and invest in the country, it is unrealistic to expect foreign investors to do so. This was the message we got from an investor roadshow earlier in the year. While the change in political leadership was viewed as positive, investors said they will wait for real change in policy direction before they invest.
Our takeaway was that they don’t want to kick start SA’s growth, but they merely want to participate in it. This means that the initial investment must be domestically generated before we see FDI.
Thirdly, it is not clear whether the momentum gained so far will be sustained, especially if we look at historical patterns of FDI. Our analysis in Figure 1 below, clearly shows that even among the top FDI recipients, no single country in Africa has attracted a cumulative $50bn over a consecutive five-year period.
The significant flows that ensued were to the commodity producers during the commodity boom, which is now over. In the absence of this boom, SA needs to incentivise private sector FDI inflows, which are more certain once committed than government-to-government commitments.
Figure 1: Cumulative five-year FDI inflows into Africa’s top recipients
Economic growth will remain weak, but the president’s investment drive is a potential game changer for the financial well-being of ordinary workers, by creating the potential for jobs and improved investment outcomes for retirement funds. However, to succeed, this drive must be complemented by clear policy that reduces uncertainty and provides incentives to attract both domestic and private-sector investment. Much still needs to be done. The new dawn has not yet arrived.
• Mhlanga is executive chief economist at Alexander Forbes Investments, and Mothata is its chief client officer.