Investment Decline Sheds Light on Growing Uncertainty Surrounding South Africa’s Economic Outlook
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JEREMY MAGGS: South Africa has witnessed a dramatic reduction in planned investments, with newly announced project values falling by 81% to an annualised R137.7 billion in the first half of this year.
To provide some perspective, this figure is roughly R580 billion less than the previous year, marking the lowest point since 2017, based on my analysis of the statistics.
This situation understandably raises serious concerns about business confidence, future growth, employment, and ultimately, government revenue. Let’s examine these issues more closely.
I’m now speaking with Isaah Mhlanga, the chief economist at RMB (Rand Merchant Bank). Isaah, welcome! Are we seeing an investment crisis, or could it be that we’re overreacting to a particularly weak six-month period?
ISAAH MHLANGA: This is indeed a troubling trend. At the start of the year, we were optimistic about investment growth. However, the upheaval from the Middle East conflict, coupled with ongoing tariff disputes initiated by the Trump administration, has muddied the waters.
It’s a mix of various factors, many of which are international. The supply chains we’ve discussed are clearly being impacted by trade tariffs.
If there’s uncertainty about how your products can reach the U.S. or other markets, you might hesitate to expand production capacity until more clarity emerges. That’s clearly had an impact.
On the domestic front, rising fuel prices are affecting the situation. This operates like a consumption tax, making consumer-facing companies wary about boosting production in the short term.
Moreover, medium to long-term concerns regarding economic policy are significant. We are entering a politically uncertain period.
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Operation Vulindlela is ongoing, and while phase one has achieved some successes, phase two is encountering challenges, with the National Treasury indicating that 80% of the announcements in this phase are delayed or derailed.
Looking ahead to 2029, what can we expect? Changes in leadership in the largest party bring more uncertainty.
Will the GNU (government of national unity) and Operation Vulindlela policies hold? If we can’t get answers to these questions, it suggests a probable reluctance to invest in production capacity until we have better clarity.
JEREMY MAGGS: Finding that clarity will be tough. This situation implies that the government is not investing to the extent it has consistently promised.
Isaah, President Cyril Ramaphosa frequently discusses an unparalleled infrastructure initiative, yet it’s clear that these aspirations have yet to materialize into a solid project pipeline.
ISAAH MHLANGA: No, the anticipated momentum is not reflected in the project pipeline. Investment growth is more dependent on private sector engagement than on the public sector.
While the public sector does play a role, the majority of funding needs to come from private sources. That’s where confidence issues stem from. We need more transparent communication from the government regarding the stability of its policy outlook.
Read: Are South Africa’s policies conducive to growth?
Perhaps more communication is necessary to assure investors that, even amidst potential political shifts, current reforms will positively affect investment in the future, easing concerns tied to the current political environment.
JEREMY MAGGS: What do you think prevents the government from making such commitments?
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ISAAH MHLANGA: A potential reason may be the unresolved disagreements on policy approaches, particularly in the energy sector concerning Eskom and the Presidency.
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Conflicting opinions regarding the emerging structures from Eskom are evident.
This uncertainty hampers potential funding partners. Visible disagreements between government bodies and the Presidency lead to declining perceptions of the situation, causing investors to remain cautious.
JEREMY MAGGS: Considering the cautious approach, private sector projects contribute a little over R107 billion to the total mentioned previously.
It appears companies may want to retain their cash, doubtful of imminent growth. What might they do with that capital?
ISAAH MHLANGA: Long-term investors now have the capability to invest up to 45% offshore, particularly pension funds with substantial capital, prompting them to evaluate foreign markets.
Within the domestic market, risk assessment becomes vital. If they view current risks as too high due to the prevailing policy environment, they may opt for government bonds instead.
Government bonds offer a lower-risk investment with a near guarantee of capital recovery.
In recent years, strong bond allocations have highlighted how public sector initiatives are drawing capital away from private sector investment.
Nevertheless, the quality of output derived from government expenditure has been disappointingly low.
We must acknowledge that rating agencies have recognized some improvements. The balance sheets of South Africa Inc. have strengthened, prompting positive rating revisions from agencies.
However, this improvement hasn’t yet translated into revitalized investor confidence, which is crucial for the future.
JEREMY MAGGS: If confidence is lacking, this weak investment is likely already impacting tax revenues. This situation invariably heightens pressure on government finances, creating a cyclical dilemma.
ISAAH MHLANGA: Indeed, weak growth combined with a growing population at 1.5% annually, while growth remains below 1%, results in per capita declines.
The primary issue lies with local government dynamics, where every citizen lives and every business operates.
If systemic issues like permitting, licensing, water infrastructure, and power distribution remain unaddressed, they will negatively impact business confidence and investment.
Sadly, local businesses often miss out on the benefits of large-scale national reforms, leaving small and medium enterprises (SMMEs) particularly at risk due to municipal dysfunction without the advantages of broader reform initiatives.
JEREMY MAGGS: Thank you, Isaah Mhlanga, chief economist at Rand Merchant Bank.