Investment plunge exposes growing uncertainty over SA’s economic outlook

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JEREMY MAGGS: South Africa has suffered a dramatic setback in planned investment, with the value of new projects announced in the first half of this year falling 81% to an annualised R137.7 billion.

Now, to give you some context, that’s around R580 billion below last year and the weakest level since 2017, if I’ve read the numbers correctly.

Obviously, this raises uncomfortable questions about business confidence, about future growth, jobs and ultimately government revenue. Let’s put all of that into some perspective.

I’m in conversation now with Isaah Mhlanga, who is chief economist at RMB (Rand Merchant Bank). Isaah, a very warm welcome to you. Is this an investment collapse or are we in danger of making too much of one particularly weak six-month period?

ISAAH MHLANGA: Look, it is a concerning development. When we started the year, we were expecting quite robust investment growth. Then we had the shock from the Middle East conflict and that compounded the tariff wars that Donald Trump and his administration started.

So it’s a conflation of many factors, partly global. That means the supply chains we’ve been talking about, triggered by the trade tariffs, are actually having an impact.

If you are not so sure how your products are going to get into the US or into another market, you are not going to expand production capacity until you are quite sure. So that had an impact.

From a domestic perspective, the shock from the fuel price is quite real. It’s a tax on consumption, which means companies that are facing the consumer are also going to be quite hesitant to expand production over the short term.

But over the medium to longer term, there are also concerns about economic policy. It’s an uncertain political cycle that we are going into.

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Operation Vulindlela is still ongoing, there have been some successes on phase one. Phase two is experiencing some difficulties, as National Treasury has updated that 80% of what was announced in phase two is either derailed or running behind schedule.

Then we can talk about beyond 2027, what happens in 2029? There are changes in political leadership in the largest party so far, which means it’s uncertain what comes after that.

Does it keep the GNU (government of national unity) and the Operation Vulindlela policies intact? If you don’t know the answers to all of those questions, it means you are likely to withhold investing in production capacity until we have a little bit more clarity.

JEREMY MAGGS: And that clarity is going to be hard to find. What it is suggesting is that government itself is failing to invest at the scale that it keeps promising.

Isaah, the president (Cyril Ramaphosa) keeps talking about an unprecedented infrastructure drive, but it’s patently obvious those ambitions are not yet showing up more strongly in this vitally urgent project pipeline.

ISAAH MHLANGA: No, they are not showing up strongly as expected in the project pipeline that we’re talking about. That’s where the problem lies. The investment drive is underpinned by investment by the private sector and not necessarily by the public sector.

Yes, the public sector has a role to play, but the majority of it has to be privately funded. That’s where the issue of confidence lies. I guess that’s where we need to hear a lot more from government in terms of the stability of the policy proposals.

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Perhaps they’re not communicating as much to say, even in the event that there are different outcomes politically, from a government policy perspective, the reforms that are taking place now, they are crystallised in how we look at investment going forward, so that it can ease the uncertainty from an investor perspective to look through the political cycle that we have now.

JEREMY MAGGS: What do you think prevents government from making that kind of commitment?

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ISAAH MHLANGA: Potentially it’s because there are still differences on policy positions. We see this starkly in what’s happening in the energy space in Eskom and the Presidency.

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There seem to be different views as far as what structure the different entities that are going to come out of Eskom are going to look like.

That introduces uncertainty to funding partners to say, if we’re not so sure, if we’re seeing disagreements between a government-owned entity and the president or government, then it means we are far worse in terms of understanding what’s going on. So we stay on the sidelines.

JEREMY MAGGS: Talking about staying on the sidelines, private sector projects then account for just over R107 billion of that total that I mentioned.

The reality, I think I’m hearing you say, is that companies will continue sitting on that cash because they don’t believe growth is going to materialise. What are they going to do with that money?

ISAAH MHLANGA: If you think about long-term investors, now they can invest offshore up to 45%. That is your pension fund industries that have a lot of capital, which means they’re going to look offshore.

If they are in the domestic market, you have to assess the risks, and if the risks seem too high, given what we’ve been talking about now, from a policy perspective, you can just put money in a government bond.

That’s like the least risk investment that you’re almost guaranteed to get your money back.

We see in the market where the allocation to bonds have been quite strong over the last couple of years, it hasn’t changed as much, which means public sector has been crowding out private sector investment, sucking all the capital into funding government.

Yet, the actual output that we get from government spending, the quality has been quite poor.

There is a change, we have to recognise that rating agencies have also recognised that a lot has been done so far.

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If you look at the balance sheet of SA Inc have repaired, which is what rating agencies have responded to by upgrading and changing ratings to positive outlooks, but we are not yet seeing that translate into better confidence.

That’s what we need to see going forward.

JEREMY MAGGS: If we’re not seeing that confidence, this weak investment is already starting, I imagine, to feed into weaker tax revenue. And that obviously puts greater pressure on government finances, and it becomes a vicious circle.

ISAAH MHLANGA: Indeed, if growth remains weak, with a growing population growing at 1.5% per year, and growth at less than 1%, it means in per capita terms, we are going backwards.

The biggest detractor has to do with local government dynamics. That’s where every person lives. That’s where every business operates. It operates in a municipality somewhere.

Which means if we are not solving the permitting, the licensing, the bulk water infrastructure, the electricity distribution, all of those things, they impact on business confidence and investment.

Unfortunately, the businesses that operate at their locality, they don’t get the positive impact that is coming out of the big reforms that are at a national level.

These are SMMEs (small, medium and micro enterprises) that do not necessarily benefit from the large infrastructure development pipeline, which means they are facing the dysfunction of municipalities and not feeling the positive impact of the reform momentum.

JEREMY MAGGS: Isaah Mhlanga is the chief economist at Rand Merchant Bank.

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