EDITORIAL: To turn the trickle of investment into a flow, get reform moving

News from the Reserve Bank that SA saw another quarter of foreign direct investment inflows is welcome, and even if the numbers were tiny the trend is at least in the right direction.

Even more welcome is the pickup during the first quarter in fixed investment, in the plant, machinery and construction projects needed to expand and modernise capacity in the economy and position it to grow faster. The foreign inflows and the local investment in the economy are a start in this direction.

But SA has a long way to go to get its levels of investment even close to what it needs to lift the economy out of its stagnation of the past decade.

That is clear in data from the latest Bank quarterly bulletin showing that even though fixed investment spending grew by 3.6% in the first quarter, after a bleak couple of years, it is still almost 11% below its average level in 2019, before the Covid pandemic. And while private sector investment has led the way, expanding by 4.1% in the first quarter to make up a full 72% of all investment spending in the economy, private investment too is still almost 10% lower than before the pandemic.

SA’s domestic savings rate is still woefully low, and it would need a big jump in foreign inflows to finance the sort of expansion in domestic investment spending it should ideally be sustaining. Those inflows are by no means assured in a world in which interest rates are rising fast in advanced economies, sucking liquidity out of global markets and putting emerging market inflows at risk.

Fortunately SA has been running a surplus on the current trade account of its balance of payments, thanks to booming commodity exports and limited import pressure from a weak economy. That means the country is less dependent than it has often been in the past for foreign inflows on the capital, financial account of its balance of payments, even if that picture cannot be relied on to last.

Fortunately as it happens, the quarterly bulletin shows inflows not only of foreign direct investment but also of foreign portfolio investment, into the equity market in particular in the first quarter. In the case of FDI, SA recorded a modest R27bn inflow in the first quarter, mainly as multinationals with existing SA subsidiaries injected fresh equity or loan capital. But that followed a robust R604bn of inflows in 2021. Added to that is that portfolio inflows turned positive again in the first quarter, after a sizeable outflow last year.

Clearly SA is doing something right. And it’s benefiting from being a lot more attractive than emerging market peers such as Russia or Turkey. But in an uncertain world, and with the level of investment in new capacity still way below what the economy needs, the need to boost confidence and investment is as pressing as ever.

That means making SA attractive to foreign and local investors who want to put their money into the economy to build for the long term — not just into stocks and bonds in the short term. There is no other way to do this than to speed up the reforms so urgently needed for growth.

Progress has been made on private electricity generation but the latest round of load-shedding is a reminder yet again of the need to fix Eskom’s own disastrous existing operations as well as bring in new capacity. Fixing Transnet is essential too, as is tackling the capacity and competence problems plaguing the state itself, eroding its ability to make it attractive to do business in SA.

Improved investment data, welcome as they are, should simply be a spur to more reform action.