South Africa’s economic growth in the coming years will be driven by infrastructure investment from the private sector and government.
If the ambitious plan comes to fruition, this spending could triple economic growth from the current rate of about 1%, leading to better outcomes in the long run.
Coupled with ongoing reforms in key sectors of the economy and a new focus on local government service delivery, local businesses will benefit and investors will be tasked with identifying the winners.
This is the feedback from Melville Douglas Chief Investment Officer Bernard Droch, who outlined what is needed to accelerate South Africa’s economic growth.
Dorocchie simply said that the country would essentially have to become a construction site and that trillions of rands would be needed to upgrade and maintain infrastructure.
He explained that since the 2010 FIFA World Cup began, there has been little investment in infrastructure from countries and public companies.
This has led to a decline in private fixed asset investment, with businesses preferring to keep cash on hand to take advantage of better opportunities and a more dynamic economy.
“When we talk about South Africa’s growth in the coming years, what is important is the government’s reform agenda to increase private participation in the economy and ease structural constraints,” Drossier said.
Although slow, these are the right reforms that will significantly boost South Africa’s economic growth in the medium term.
This next step is infrastructure investment, which is measured by the Gross Fixed Capital Formation Index. This has stagnated or declined over the past 15 years.
“South Africa’s growth will be primarily driven by infrastructure investment, including water, roads, electricity, railways and ports,” Drossier said.
“This is essentially the foundation of the economy and we need it to work to deliver better outcomes. First and foremost, the basic infrastructure needs to work.”
Drochy explained that the amount of money being spent on this area will be significant, boosting the local economy and hopefully attracting private funding.
Drochy expects business confidence to return once the government’s infrastructure plans come to fruition and private sector participation is increased and encouraged.
This should create a virtuous cycle in which private companies invest some of the cash they earn from side jobs in fixed assets and growth.
A rough estimate of the amount of money that will need to be spent on key areas of reform and the economy is outlined in the table below, courtesy of Mr. Drossier.
R1.5 trillion gold mine
South African businesses currently have around R1.5 trillion in cash deposits in various accounts with asset managers and banks.
This cash is sitting on the sidelines and is not being used to invest in growth, expansion, or acquisitions. Rather, they collect a tidy amount of interest and provide a cushion against shocks.
South African businesses have historically held more cash than their global peers, both as a buffer against shocks and as a war chest for investment at the right time.
Stanlib chief economist Kevin Lings explained that he believes South African businesses need to have reserves of cash for comfort and security reasons.
Due to low confidence, companies are reluctant to allocate this capital to new projects to expand their operations and increase employment.
Rather, much of the investment from companies in recent years has taken the form of subsistence investments.
This is to keep the door open by redirecting funds to alternative energy supplies, backup water supplies and security.
Investment needs to increase significantly to boost economic growth and reduce unemployment.
“The current level of investment is mainly maintenance capital investment and kind of stuck, and companies are waiting for a better environment,” Rings said.
“Rather than putting capital toward growth and jobs, companies are putting it into money market funds and call accounts.”
For this money to be withdrawn from these accounts into the “real” economy, business confidence would need to improve significantly.
Companies must be able to reliably predict future operating environments and growth prospects to justify long-term investments in expanding operations and increasing employment.
This is not the case in South Africa, where business confidence is constrained by heightened policy uncertainty and economic stagnation.
“What we really need in South Africa is what we call expansionary capital investment, and that tends to depend on confidence,” Rings said.
“This kind of capital is unlikely to suddenly and miraculously materialize overnight, even with trillions of dollars in cash sitting idle.”
“We need to put policies in place that lead to that outcome, and our view is that the best way to start doing that is through public-private partnerships.”
