Fixed investment levels in SA too low to spark recovery - institute

Cape Town – Fixed investment in South Africa has slumped significantly since 2008 and currently sits at 19.6% of gross domestic product, according to a report by the Institute of Race Relations (IRR).

Fixed investment comprises investment in machinery, land, buildings, installations, vehicles or technology.

South Africa’s fixed investment crisis deepened in the aftermath of the 2007 Polokwane conference, the IRR says. Data shows fixed investment levels peaked in the decade to 2008 and subsequently fell.

Current fixed investment levels of below 20% also fall short of the 30% target mooted in the national development plan.

READ: South Africa: The 'wait-and-see' economy 

In addition, private investment as a percentage of total fixed income has fallen from a high of close to 75% in 2005 to 61.8% today.

“Levels of fixed investment are falling far behind what is necessary to secure an economic recovery in South Africa," says IRR research head Thuthukani Ndebele. “[The current 19.6% level] is much too low to drive an economic recovery capable of securing the jobs to address levels of poverty and inequality in South Africa.”

Real gross fixed capital formation grew by double digits from 2003 up to 2008, but took a significant knock in 2009 with negative growth of 6.7%. It recovered somewhat in 2013, bouncing back to 7.2%, but found itself in negative territory again in 2016 at -3.9%.

Ndebele says an economic growth recovery in South Africa is just not possible in the absence of fixed investment recovery.

READ: Could it be an extended recession? 

“A recovery however is unlikely in the current hostile investment policy climate.”

The ANC deliberated on policy for the past six days in Johannesburg in preparation for its elective conference at the end of the year. However, no significant policy changes have been recommended as such and the conference was dominated by the leadership succession race between two factions – supporters of former African Union chairperson Nkosazana Dlamini-Zuma, and Deputy President Cyril Ramaphosa.

Mining and manufacturing not meeing expectations

Looking at the economic sectors and subsectors that are currently attracting fixed investment, the IRR found that mining and manufacturing – the two industries the ANC-led government is pinning its hopes on for GDP growth – lure lower levels of fixed investment than finance and community and social services.

Mining attracted 11% of all fixed investment in 2016, while manufacturing garnered 13.1%.

Finance attracted 14.6% of fixed investment and community, social and personal services 21.5%.

READ: Policy hits economy harder than commodity cycle 

“South Africa’s evolution into a high-tech, high-skills, post-industrial economy remains well on track, even in the low GDP growth environment,” Ndebele notes. “Agriculture, which receives a disproportionate degree of government policy attention, attracted just 2.4%.” 

These figures also represent a trend among investors to seek out relatively high-skilled tertiary sectors of the economy instead of sectors such as mining, manufacturing and agriculture. 

“To attract investment into the mining and manufacturing and agricultural sectors, those reforms will require a fundamental reworking of the policy environment,” Ndebele says. “Without such reforms, the economic prospects of less skilled people in poorer areas of the country will remain bleak.”