FDI is down, but SA is weathering the storm well
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BY all accounts, the real impact of the 2008 global financial crisis will be understood fully quite late. This is true if you consider the lack of a coherent theoretical platform upon which analysis of that situation is based, with the tendency among analysts and economists being to defend the assumptions of their respective schools of thought even when no useful insights have emerged from them.
Greece remains the landmark site of the legacy of that financial crisis as it continues to battle a debt crisis that has led to its banks being temporarily shut down as well as the threat to its membership of the EU. The crisis is magnified in Greece but the whole global economy still struggles to pull itself out of the post-2008 state of slow growth and high volatility of the markets. This is visible also in the dip in global foreign direct investment (FDI) inflows, which indicate a general uncertainty about the global economy that investors have.
It is for this reason that I find it disingenuous for some writers to lead a charge that projects the ANC government as failing to sustain FDI flows into the country. The rallying point for this argument is the fact that we have seen declines in the amount of capital inflows in the last year.
This is disingenuous on account of the pretence that this is exceptional to South Africa without placing and judging our performance within the prevailing global circumstances.
According to the UN Conference on Trade and Development (Unctad), global FDI inflows fell by 16 percent last year to $1.23 trillion (R15 trillion), which is down from $1.47 trillion in 2013. This decline in FDI flows was influenced mainly by the fragility of the global economy, policy uncertainty for investors and elevated geopolitical risks.
Given the decline outlined above, there are regional differences that indicate that while developed economies and economies in transition saw significant declines of flows, developing countries remain at historically high levels. FDI flows to developing economies increased by 2 percent to a historically high level last year, reaching $681 billion.
It is now quite evident that FDI flows to developing countries account for 55 percent of the global total. Southern Africa received $10.8bn of FDI last year, which is down 2.4 percent from 2013. South Africa however remains the country that receives the most FDI in the region and on the continent, according to Unctad.
The fact of South Africa capturing the highest market share of FDI inflows is consistent with the healthy macroeconomic policy framework that successive ANC administrations have cemented. In pursuing transformation and development, the ANC has always asserted its commitment to guaranteeing the certainty of returns and investment protection to investors.
It is in this context that, in his State of the Nation Address this year, President Jacob Zuma announced the establishment of an inter-department clearing house for investment and investment promotion. The establishment and rolling out of this structure is a high priority for the government and has proceeded with speed in order to achieve an institutional mechanism that will facilitate investment into South Africa and will cut red tape and other institutional hurdles that investors may face.
The cabinet also instructed the Department of Trade and Industry to initiate work towards an Investment Act that would update South Africa’s investment regime. This process saw the culmination of the draft Promotion and Protection Investment Bill, which seeks to promote investments and clarify the level of protection that an investor may expect in South Africa. The bill also aims to preserve the government’s right to pursue constitutionally-driven national development objectives and recognises the right of governments to regulate in the public interest.
The bill further seeks to achieve balances vis-à-vis the rights and obligations of all investors, and sets guidelines for the adequate protection for such investments on a non-discriminatory basis. The bill was subject to a public comments process, which culminated in the tabling of the bill to Nedlac for further consideration by business, labour and government. The bill was considered by the cabinet on June 24 and will be introduced to Parliament this month.
As indicated earlier, global investment flows remain constrained due to fragile economic conditions, and this is reflected in the fact that even South Africa as the highest FDI recipient in Africa saw a drop in investment to $5.8bn last year, compared with $8.3bn in 2013. This decline to South Africa’s attraction is incidental to the general global downturn but its comparative advantage remains high on account of its comparatively healthy policy framework.
A critical point is the fact that FDI into Africa is increasingly being made by companies from developing countries such as China and India. This coincides with large divestments from Africa of a number of firms from France, the US and the UK, however these assets were taken up by developing country investors. This trend indicates the importance of the Brics configuration from an investment perspective.
Equally significant is the fact that services account for the largest portion of Africa’s stock in inward FDI (48 percent of Africa’s total stock of FDI), most of it concentrated in countries such as Morocco, Nigeria and South Africa.
A historical analysis of investment trends into South Africa reveals that between January 2003 and January this year a total of 1 275 FDI projects were recorded, according to the FDI Markets Trends Report 2003 – 2015. These projects represent a total capital investment of R812.85bn, which is an average investment of R637.41 million per project. During the period, a total of 186 043 jobs were created.
Contrary to recent media reports, the investment pipeline into South Africa remains robust. According to the Investment Promotion and Inter-Departmental Clearing House at the Department of Trade and Industry, South Africa attracted R43bn in FDI in the previous financial year. Due to the cyclical nature of investment it should be expected that both inward and outward investment stock may vary from year to year.
Over a protracted period of time, South Africa has maintained its position as the top FDI destination in Africa as well as a prolific investor on the African continent. Recent data indicate that this trend is continuing based on the 2014/2015 investment pipeline and the impact of various government programmes across the South African economy.
Thus our continued topping of the FDI destination list is testimony to the strategic effectiveness of the ANC’s economic management principles. Despite the stormy climate of global financial markets the South African economy is threading healthier grounds in comparison to even Europe and other parts of the world.
Mzwandile Masina is the deputy minister at the Department of Trade and Industry.