DARYL SWANEPOEL: SA’s Jekyll & Hyde economy puts investors in two minds

SA urgently needs to find a cure for the Jekyll-and-Hyde syndrome that so often leaves the economy reeling from the effects of its more troublesome personality. Like the fictional characters of the tale in which the likable Dr Jekyll is transformed into the evil Mr Hyde, SA’s strengths that potentially make it a desirable investment destination often hide some darker realities that leave investors anxious and second-guessing.

Investors seeking competitive returns linked to some of the country's comparatively superior fundamentals become rattled by worrisome factors such as policy uncertainty, corruption, failing infrastructure, and the country’s security situation, at a time when increased investment is sorely needed to spur a new wave of economic growth and aid recovery from the effects of the Covid pandemic.

Foreign direct investment (FDI) has decreased sharply in recent years. Before the global financial crisis of 2008/09 annual FDI inflow was about $9bn. This fell to $5.1bn in 2019 and $3.1bn in 2020. Since the dawning of democracy in 1994 SA has positioned itself as a gateway for expanded foreign investment in Africa, but in the past decade this has been undermined by falling confidence linked to endemic corruption, weakened state capacity and deteriorating service delivery.

Despite a long history of injustice that has resulted in high levels of unemployment and racialised inequality and exclusion, SA’s strong manufacturing base, world-class financial system and relatively skilled workforce have helped the country overcome its geographic disadvantage of being situated far from major trading partners.

In recent years these advantages have been eroded. Despite a population of nearly 60-million, the country experiences a shortage of human capital, and companies find it difficult to conduct their business. Education system failures are to blame, but so is emigration. With a steady exodus of professionals leaving, the skills gap is not easily filled.

A major problem for foreign investors is that they have difficulty in bringing in foreign managers and skilled workers to run their enterprises. The application processes for permits and visas is cumbersome, time consuming and bureaucratic. BEE is also viewed by many as a barrier to entry and a disincentive to foreign investment, with the shifting of BEE goalposts resulting in much uncertainty. The relative volatility of the rand is another factor that causes concern.

Against this background, SA must identify strategies to position itself as an attractive and compelling investment destination in a highly competitive world. Serious investors take a long-term view, and any uncertainties make their calculation of the reward needed to make investment viable that much higher. These calculations are informed by the actual strengths and weaknesses of the economy, not by the promises contained in policy planning documents.

The Inclusive Society Institute recently met foreign investors to canvass their views on the investment climate and to come up with implementable ideas that will place the economy on a higher FDI and growth trajectory. These foreign investors advise SA to build on the country’s strengths; bolster the industries where it has a competitive advantage, rather than entertaining those in which it is unlikely to have the upper hand. Money flows to where there is a competitive advantage. For instance, efforts should be directed at ensuring that the automotive industry and supply base are even more internationally competitive, especially as the shift to electric mobility gets under way.

Realistic targets

Pruning ambitions to focus on a smaller number of deliverables will also help ensure that plans are implemented more effectively. Policy success in three to five key areas will go further than casting the net too wide without the means or capacity to implement overly ambitious plans. For example, SA is in a prime position to pursue sustainable energy investments and invest locally in “green” hydrogen in a big way, with key resources readily available. Interest in such investment comes at a time when there is a global shift in mindset towards delivering advanced environmental, social and governance outcomes. Should SA manage to deliver cheap, sustainable energy, it could attract industries that are no longer viable in the West owing to space constraints or the higher cost of electricity. Sustainable energy investments will also help the country deal with its serious electricity supply issue, and such a shift would make the transition to widespread electric mobility feasible.

SA should establish itself, geopolitically, as an alternative base for manufacturing should supply chains or trade routes be disrupted in other jurisdictions, as has been experienced in the wake of the Covid pandemic and by the closure of the Suez Canal earlier this year. Since SA lacks the volumes required for multinationals to view the country’s domestic market as a clincher, investors must be encouraged in other ways to feel there is a reward justifying the risk they take investing in a country. This could be in the form of concrete action linked to the African Continental Free Trade Area, which aims to open the African market to greater trade opportunities, as well as greater diplomatic focus on the trade agreements the country is party to with the EU, China, India, the US and other parts of the world.

There is a trust deficit between government and business, specifically long-term investors. Persistent weaknesses are proving that the government is long on rhetoric but less astute at clinching the deal. A concerted effort is needed to build trust between government, authorities and businesses. Unless trust is restored, opportunities for growth and employment will be lost as business will view SA as being too risky.

Government must acknowledge that improved investor confidence will be the cheapest and most effective stimulus for the economy. Investors, both foreign and domestic, need to see government putting its words into action to regain confidence in the future of SA. It is time to bury Mr Hyde and rediscover our African potential.

• Swanepoel is CEO of the Inclusive Society Institute.