South Africa has seen foreign investment increase for the first time in a decade, but is this enough to sustain our emerging economy, asks Simon Segal
Perhaps the greatest and most visible achievement of the government of national unity is the dramatic reversal in capital flows to and from the country.
The Reserve Bank’s latest Quarterly Bulletin and its gold and forex reserves in November bear testimony to the degree of foreign confidence in the country since President Nelson Mandela’s inauguration last May.
The second half of 1994 and the first three quarters of 1995 have seen net capital inflows of around R9-billion and R14-billion.
This is the first time in over a decade that the country is experiencing a net inflow of capital. Over the decade from 1984 to 1993, South Africa had to accommodate a net capital outflow of over R50-billion. A further R3,7- billion flowed out in the first half of 1994.
Most encouraging is that the bank is able to report the capital inflows of the past two quarters consist “mainly of long-term capital” which are less volatile than short-term flows. Net long-term inflows were R3,7-billion in the second quarter and R2,7-billion in the third
But this is not as beneficial as foreign direct investment in bricks and mortar. Here too, evidence is mounting that foreign investment in South Africa is picking up. Information services group BusinessMap SA, the only known source to be developing a data base that monitors foreign investment, calculates that since the elections last April, some R8,5-billion has been committed by foreign firms in investment money. Of this, R6-billion has been committed this year, indicating the
The large capital outflows, which depleted net reserves to zero in early 1994, were only sustained by large surpluses on the current account – R46,4-billion from 1984 to 1993. The bank estimates that capital outflows accounted for a loss of at least two percent in gross domestic product (GDP) in each of these years.
With the net inflows, the country has been allowed to run a deficit on the current account. The deficit was R2,2-billion in 1994 and R9,1-billion in the first nine months of this year. If this is annualised on a seasonally adjusted basis, the deficit is running at an annual R11,5-billion or 2,3 percent of GDP which is considered a reasonably comfortable position.
The issue is with its limited reserves, relatively high import penetration ratio and a high marginal propensity to import, South Africa has difficulty sustaining a current account deficit, and thus economic growth, for any lengthy period.
In a survey of 10 economic units, the forecast for the current account deficit ranges from R10,5-billion to R12,7-billion for this year (the average forecast is R11,9-billion). Thereafter economists are divided.
Seven units see a higher deficit next year where the forecast ranges from R9-billion to R15-billion (averaging 12,6-billion). Two units see this rising trend continuing into 1997 where the forecast ranges from R5-billion to R18-billion (averaging R10,6-billion).
Sustaining a current account deficit depends on capital inflows. With strong capital inflows more than sufficient to finance the present current account deficit, net reserves have risen R4,7-billion in the first three months of the year. This has allowed the bank to reduce its foreign loans from R1,6-billion in June to R300-million in October.
South Africa’s gross reserves reached R15- billion at the end of September. But this is still only worth some six weeks of imports. The conventional guideline is that gross reserves should cover three months worth of
The bank’s gross reserves rose by a sharp R1,5-billion in November to R13,4-billion. The bank has access to a further R15-billion in short-term international credit facilities, leaving some R30-billion in foreign exchange that can be used to support any temporary balance of payments deficit.
This current account deficit comes despite a 20 percent rise in exports in the first nine months of the year. The bank notes that exports are now 20,1 percent of GDP compared to 17,7 percent in 1994 and a low of 10,7 percent in 1984.
It attributes this to the opening up of international markets, the lifting of sanctions, export incentives, the low level of domestic economic activity, a drop in the exchange rate of the rand and the opening of enterprises developed specifically for the export market.
Foreign capital inflows are critical to any emerging economy. Without regular net capital inflows growth is limited by domestic savings which in South Africa, now down to only 17 percent of GDP, are insufficient to sustain an acceptable minimum rate of economic growth. Unless domestic savings can be increased dramatically, an annual growth rate above three percent will only be sustainable if domestic savings are supplemented with a net inflow of foreign funds.
Bank governor Chris Stals estimates that to achieve a growth rate of five percent requires a net capital inflow of around $1-billion.
Similarly the Katz committee that investigated the deregulation of the Johannesburg Stock Exchange finds “only a few economies can grow without the injection of new capital from abroad; the imperative for international capital applies to South Africa in its new emergent form. Foreign investors must be encouraged to participate in South Africa’s growth which in turn would result in the desired net inward flow of capital.”
Despite this improving trend, foreign direct investment is still small relative to the size of the economy (not even two percent of GDP). It is not yet being converted into the type of large-scale, long-term investments that will substantially expand the economy’s productive