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Despite high returns, investors slight SA

Economy

Ethel Hazelhurst

South Africa offers “stunning” returns to investors, according to Sandeep Mahajan, a World Bank economist. Yet the economy fails to attract enough investment to achieve the government’s 6.5 percent annual growth target.

Growth of that order is needed to create 5 million jobs in the next 10 years – the goal of the New Growth Path outlined by Economic Development Minister Ebrahim Patel.

Mahajan was speaking at the launch, in Johannesburg yesterday, of a World Bank economic update on the country, the first of a new, twice-yearly series. The second issue will be released in December.

The report says real returns for owners of “physical capital” – such as factories – have risen sharply since the early 1990s, to an average rate of 15 percent between 1994 and 2008. If inflation is included, returns are as high as 23 percent. Moreover, the rate of return accelerated over the period.

In the five years before the global recession – 2003 to 2008 – real rates of return picked up from 15 percent to 20 percent. If inflation is added, nominal returns were close to 30 percent. This rate of return puts South Africa in the same league as China, according to Mahajan.

But private investors had failed to respond, he said, because they also looked at risk and barriers to doing business.

The report identifies four key issues that deter investors: industrial competition in South Africa is much weaker than in its international peers; skills development; labour relations; and low savings rates.

Based on the experience of other countries, South Africa’s savings rate would have to be ratcheted up from its present level of about 16 percent of gross domestic product (GDP), and its investment rate from 19 percent, to 25 percent to reach the state’s growth target.

Marcelo Giugale, a World Bank director, said the outlook for most emerging markets was bright, as the engine of growth switched from the developed to the developing world. He forecast average growth of 6 percent a year over the next five years. “Even Africa will have growth of at least 5 percent.”

Giugale described the report as a contribution to help South Africa catch this “fast-moving train”. Present estimates are that South Africa will grow at 3.5 percent this year, 4.1 percent next year and 4.4 percent in 2013. The report says: “The long-term potential growth rate under the current policy environment is estimated at 3.5 percent.”

To catch up with the emerging market trend, South Africa would have to work for “more effective internal integration” of its own developed and informal economies and “smarter regional integration”.

It says a big push is needed on public transport infrastructure to address the problems created by “spatially separated townships and informal settlements where the bulk of the unemployed live”. It also advocates programmes to “enhance financial inclusion and improve the cognitive and technical skills of youth”.

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