John Campbell

Africa in Transition

Campbell tracks political and security developments across sub-Saharan Africa.

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Two Perspectives on Falling Foreign Direct Investment in South Africa

by Guest Blogger for John Campbell
November 14, 2012

South African Finance Minister Pravin Gordham delivers his annual budget speech to Parliament in Cape Town 23/02/2011. (Nic Bothma/Courtesy Reuters) South African Finance Minister Pravin Gordham delivers his annual budget speech to Parliament in Cape Town 23/02/2011. (Nic Bothma/Courtesy Reuters)

This is a guest post by John Causey, an independent private equity consultant based in Cape Town, South Africa.  He specializes in sub-Saharan Africa transactions, with investors mainly from the EU and US.

South Africa’s foreign direct investment (FDI) inflows have dropped by 43.6  percent in the first half of 2012. The decline is the largest among all developing countries.

Collectively, developing economies experienced a decline of 4.8 percent. Globally, FDI was down 8 percent, and in Africa, flows were up 5.1 percent, over the same period. China remained–outside of the United States–the most attractive magnet for foreign investment in the first half of 2012.

Why is investment capital avoiding South Africa?

The UN’s Global Investment Trends Monitor report suggests a simple answer; the significant fall in FDI inflows in the first half of 2012 is due to slower economic growth in South Africa. The reasons for the stifled economic activity and deteriorating investor sentiments are being widely debated in South Africa.

First; the bad news.

In spite of having all the advantages–a developed stock exchange, substantial mineral wealth, strong liberal constitution, and effective parliament–the country, nevertheless, lags behind many of its peers in Africa, both economically and politically. Morgan Stanley, a prominent global Investment Bank, predicts that Nigeria will overtake South Africa by 2025, becoming the Continent’s economic superpower.

The Economist has also weighed in. Through an article, widely read in South Africa, they drew a line in the sand, plainly describing the bleak view many investors now hold of the rainbow nation. The picture painted was of gathering gloom fed by the recent rating agency downgrade of South African sovereign debt, mining strikes–including the Marikana strike which led to the death of thirty-four miners–the state’s inability to provide basic services, poor education, growing gap between rich and poor, and persistent one-party domination. Intensifying the gloom are the carnivals surrounding the saga of Julius Malema, and the now infamous, revealing painting of President Jacob Zuma.

The news is not all bad!

As a response to the barrage of negativity and anxiety surrounding the investment climate in South Africa, the founder and former CEO of FirstRand, Paul Harris, opined that South Africa has much to offer. He brushed aside criticisms, partially blamed the naysaying diaspora for the negative investor perceptions, and cited recent successes in rugby and at the Olympics as reasons for optimism.

South Africa’s surprise admission into the BRIC consortium of nations in 2010 increased its clout on the world stage. It could pay dividends in the future as the ANC-led government continues its eastward drift. Inclusion into Citigroup’s World Government Bond Index (WGBI) should increase flows into sovereign debt, and also further substantiates South Africa’s strong position in the emerging debt markets.

Based on the numbers, it seems the international investment community has selected the negative perspective, and is voting with its pocketbook. Which way do you spin the numbers?

Post a Comment 3 Comments

  • Posted by Keet van Zyl

    The fact that many DFI’s view South Africa as “too developed” (versus the rest of Africa) for investment weighs in on the Bad News…

  • Posted by Brennan Kraxberger

    Though labor unrest and intrigue among political elites has grabbed the headlines, the most damning fact about contemporary South Africa is its under-performing education system. It will unfortunately be a slow slog to improve educational performance.

  • Posted by Sabelo Ndebele

    One of the most critical element elements that one needs to consider in terms of FDI into emerging markets is the return profile of any investments into africa. First and Foremost, South africa, has the most developed financial markets in Africa, but with that said, the elements of potential upside from price discovery are limited by the fact that south africa, is already a well researched investment destination relative to its african counterparts, and thus the probability of finding a mispriced investment is limited.

    Secondly if one looks at the key developing markets growth industries, such as Telecoms, Minning, Retail and Banking. These industries from an emerging markets perspective are typically the darling of Emerging market investors as the are the first to tick up in growth stage as investor take adantage of the upwardly mobile dynamics of a nation. With this in mind if we analyse each industry, one will notice, firstly in Telecoms, south africa, has a mobile penetration of about 110%, thus implying a limited to no growth here. With reference to retail, and this linkage can also be linked to Banking, only about 8 million people are employed in South africa, a country where retail sales are driven by credit. Yet they are over 19.6 million active account holders of which above 9 million of these accounts are impaired by over three months. The implication of this is that despite an SARB statements stating that unsecured lending is not at Bubble level, the numbers are starting to show different, more, thus reducing the growth prospects in these two key industries. More so as a case study, if one was to look at the root cause of the marikana strikes, one will realise that is was not issue of salaries per se, but rather a reactive issue by the employees of the the mines to emonulment orders placed on their salaries by financial institutions and retailers to recover bad debts.

    Lastly with reference to minning, south africa, is a country who biggest contributor to GDP is minning. With that said, two key factors will affect is growth prospects in this area, relative to other minning investment opportunities such as those in Australia. Firstly, they would typically be the fact that South africa, has been minning its minerals particularly Gold for over a century, and as such the depth has increased exponentially, thus raising the cost and reducing return profile. Secondly, the cost of a labour, Minning using high labour count is expensive, and given the levels of unemployment and the unionisation assosciated with that labour, the costs of switching to a more efficient production method makes near impossible. Thus one finds that the minning in south africa, is faced with costs rising costs and limited rising profits, which effectively reduce the return profile of South african minning.

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