Strong foreign inflows in first three months despite downgrades
CAPE TOWN - South Africa experienced strong foreign direct investment (FDI) inflows in the first three months of the year despite a slew of sovereign ratings downgrades that pushed the country deeper into junk as a result of continuing deterioration in fiscal strength and structurally very weak economic growth.
The SA Reserve Bank (SARB) yesterday said the country experienced a R29 billion increase in investments compared to R10.5bn in the final quarter of 2019.
SARB said combined quarterly FDI increased from R26.76bn in 2017, to R49.12bn in 2018 and R66.82bn in 2019.
However, analysts warned the impact of the Covid-19 pandemic and tightening protectionism globally were likely to restrict further inflows for the rest of the year.
Optimum Investment Group economist Dr Roelof Botha said strong quarterly FDI inflows in 2018, 2019 and the first quarter of 2020 represented positive political sentiment about investing in South Africa after President Cyril Ramaphosa assumed office in 2018.
“Negative quarterly FDI figures, or investment outflows from South Africa in the preceding three years from 2018, represented negative foreign investor sentiment during the years of state capture under president Jacob Zuma,” Botha said.
The foreign acquisition of a domestic food and beverage manufacturer boosted the figure in the first three months, with the local competition authorities approving US food giant PepsiCo’s $1.7bn (R28.24bn) takeover of food and drinks producer Pioneer Food Group in February.
At the same time, portfolio investments, the buying and selling of securities such as bonds and shares, showed a sharp outflow of R97.6bn in the first quarter, compared to inflows of R9.3bn in the fourth quarter of 2019.
Non-residents sold bonds worth R74.4bn in the first quarter, while selling R23.1bn in equities, the SARB said.
South Africa saw aggressive selling of government bonds in March and April as the Covid-19 struck, forcing the central bank to enforce emergency liquidity measures and launch a quantitative easing style purchase of bonds in the secondary market.
Baker McKenzie, the international law company, said in an online briefing note that investments had been a crucial driver of economic development and a clear priority under Ramaphosa.
But the firm said South Africa would, however, struggle to attract the level of investment it required to meet its post-Covid recovery need.
This was despite significant progress by the government in its campaign to attract $100bn of FDI by 2023.
The country fell into recession earlier this year and was recently downgraded to “junk” status, which might affect its ability to attract FDI in a world where company valuations were at an all-time low, Baker MacKenzie said.
FDI often takes the form of inbound mergers and acquisition (M&A) transactions.
An analysis of Refinitiv data showed the volume and value of M&A in SA dropped 60 percent to $3.3bn in the first half of 2020, down from $8.2bn for the same period last year.
Barloworld’s acquisition of the equity assets of both Wagner Asia Group and SGMS LLC by its Mongolian subsidiary, for $212million each, were the biggest cross-border transactions in South Africa in the first half of this year, Baker McKenzie said,
The volume of M&A deals in South Africa fell by 18 percent year-on-year, with 132 transactions recorded in the first half, down from 160 in in the first half of 2019.
Baker McKenzie said globally, authorities were also tightening restrictions and putting in place barriers to foreign investments to protect industries that may be left vulnerable during the uncertain economic times.
These measures were mainly aimed at increasing scrutiny of inward FDI to prevent hostile acquisitions.
BUSINESS REPORT ONLINE