ANDILE NTINGI: SA desperately needs to get its act together

SA could be the land of milk and honey, yet it is struggling to create a conducive environment for the required cows and beehives.

A growing number of South Africans are trapped in a rate race, helplessly watching their salaries and wages being eaten up by the high cost of living.

The only solution is to grow the economy faster to boost aggregate national income. However, the economy has been stagnant since 2009, growing at an underwhelming average of 1.14% annually — far below the rate required to create millions of decently paid jobs.

The seven years that preceded the 15-year stagnation was SA’s golden age in its 30-year democracy — the economy grew at an average annual rate of 3.9% between 2001 and 2008.

The tried-and-tested method of increasing national income quickly involves attracting direct investment to finance gross fixed capital formation (GFCF), whereby investors spend cash on physical assets such as new machinery and factories to increase production while government builds roads, railways, dams and power stations to support efficient production and transportation of goods. 

Countries with high levels of domestic savings such as Japan, Taiwan and South Korea have achieved economic advancement by financing fixed investment from domestic savings instead of relying on foreign direct investment (FDI). While FDI has its benefits, including job creation, skills and technology transfer, it can also lead to repatriation of profits and shifting of tax liability from a host country to tax havens. 

With its low gross savings, SA relies heavily on foreign investment in local equities and bonds to finance its GFCF, with the bulk of investments concentrated in financial services and mining, and to a lesser extent in manufacturing.

Boost savings

Gross national savings as a percentage of SA’s GDP have slipped to 14.87% in 2022 from 17.5% in 2003 — far below the global average of 26.8% of GDP. This low savings ratio isn’t helpful in terms of our GFCF, which has increased modestly to 16.2% of GDP in 2020 from 15.2% in 2002, also far lower than the peak of 32.1% reached in 1976.

The government wants to increase fixed investment to 30% of GDP by 2030 to accelerate economic growth to about 5.4%. One of the trends that stand out about SA’s GFCF is the decline in private sector investment over the past two decades. This decline is reflected in the stockpiling of cash between 2010 and 2017 by the corporate sector, led by manufacturing companies.

A study published in 2017 by the University of Johannesburg’s Centre for Competition, Regulation & Economic Development found that cash reserves in the JSE’s 50 biggest companies rose from R242bn to R1.4-trillion between 2005 and 2016.

As a result, the share of private sector investment spending in GFCF dropped from 73.3% over 2000-2004 to 66.7% in 2015-2019, while public sector investment increased from 10.2% to 16.9% in the same periods.

The government has been struggling to convince the cash-hoarding private sector to invest a big portion of its money in the domestic economy to reverse the de-industrialisation that has characterised the past two decades.

Investment incentives

It is promising to implement economic reforms to remove investment bottlenecks and reduce the cost of doing business. To entice investors it is offering tax incentives to export-orientated manufacturers that set up their operations in special economic zones (SEZs), some of which are located along the coast and others inland. 

Since 2015 there has also been a push to develop black industrialists through the Black Industrialists Policy (BIP), which has financed black entrepreneurs to the tune of R100bn who operate in manufacturing, mining, energy, agriculture and services-orientated sectors such as property development and transport and logistics.

According to trade, industry & competition minister Ebrahim Patel, the BIP has created 100,000 sustainable jobs since its inception. President Cyril Ramaphosa has also been inviting investors to SA since 2018. His investment drive has attracted R1.5-trillion in new investment pledges, more than R500bn of which has been converted into real fixed investment.

However, all these investment promotion efforts have had mixed results due to Eskom struggling to meet electricity demand while transport and logistics parastatal Transnet has underinvested in its rail and port infrastructure, stifling exporters, and deterring potential investors.

Turning to crime 

Another issue undermining SA’s attractiveness as an investment destination is rampant crime and corruption, which is resulting in some commentators comparing SA to the US Wild West in the late 19th century where armed bandits robbed banks and raided trains to steal valuable cargo. 

This perception has gained momentum due to the failure by SA’s authorities to swiftly bring to book white-collar criminals who defraud investors in listed companies. SA’s reputation has also been tarnished by lack of progress in prosecuting politicians and businesspeople implicated in the 4,750-page state capture report.

SA has also struggled to combat serious organised crime, ranging from building hijackings, illegal mining and cash-in-transit heists to illicit financial transactions, kidnapping of business people for ransom, and extortion syndicates that demand protection payments.

The failure to contain serious financial crimes contributed to SAs greylisting by global anti-money laundering body the Financial Action Task Force (FATF) in February last year.

SA has no option but to confront rampant criminality head on to restore its credibility as an attractive and safe investment destination. Failure to do so will deter investment, worsen unemployment, and keep many South Africans trapped in poverty and delay SA’s removal from the FATF’s greylist.

• Ntingi is founder of GetBiz.