SA struggling to attract investments - Gordhan

Cape Town – Weak business confidence in South Africa and low profitability weigh on investment flows, Finance Minister Pravin Gordhan has said in his 2017 Budget Overview. 

During the first three quarters of 2016, investment in fixed capital fell by 3.9% – the first decline since 2010. Private business investment showed the largest decline, while public corporations also invested less as they delay capital expenditure plans. 

Gordhan said investment growth was expected to recover moderately, from 1.5% in 2017 to 2.8% in 2019.

"However, levels of domestic savings remain insufficient to fund investment expenditure."

He pointed out that South Africa compared poorly with countries such as China, India and Indonesia, as far as the ratio of investment to GDP is concerned. 

"In South Africa, the ratio of investment to GDP, at just over 20% in 2015, compared with more than 40% in China and over 30% in India and Indonesia."

This is far lower than the targets set out in the National Development Plan (NDP) which envisages an investment ratio of 30% of GDP by 2030, of which 10% is expected to come from the public sector.

The rand 

The rand, which traded at R16.38/$ at the beginning of 2016, strengthened considerably and closed the year at R13.84/$.

"The rand is currently moving in line with other developing country currencies," Gordhan said. 

Low inflation would help to stabilise the currency, which in turn would support investment and contribute to the competitiveness of South African exports. 

Current account deficit 

The current account deficit remained stable during 2016. The current account deficit stood at 4.1% in the third quarter of 2016, down from 4.3% recorded in 2015. 

The persistent current account deficit was a sign of insufficient levels of domestic savings to fund domestic investment and the high reliance on foreign savings. 

"This increases South Africa’s vulnerability to capital outflows," Gordhan said.

Inflation

Headline inflation increased to 6.4% in 2016, from 4.6% in 2015. 

The higher inflation rate was largely driven by higher food prices (10.8%, compared with 5.1% in 2015) and petrol prices (1.6%, compared with -10.7% in 2015). 

The Reserve Bank had increased the repo rate by two percentage points since the beginning of 2014 to anchor inflation expectations within the target band of 3% to 6%, Gordhan said. 

Headline inflation was projected to remain above 6% in 2017 and to decline to 5.7% in 2018. The main contributor to declining inflation over the medium term was lower food price inflation.

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