Private sector investment is on the up, but may not be sufficient to generate real economic activity, writes Simon Segal
Nedcor’s Economic Unit estimates that R137-billion will be spent on capital expenditure by the year 2001. This is 20% higher than estimates of R114-billion a year ago for the five year period to 2000. The general consensus among economists is that gross domestic fixed investment (gdfi) growth will continue to underpin economic growth over the next two years but at a more modest level. Nedcor talks about a 12% growth in real (inflation-adjusted) gdfi this year and 9% in 1997. But this is off a dismally low base and the extent to which it can significantly boost economic output and lead to more jobs is limited. After plunging 29% over the decade to end 1993 and from an average of 26% of gross domestic product (GDP) over 1946-1985 to only 14% in 1994, gdfi is still far from its peak. At an estimated R55-billion at the end of 1995, real gdfi is still 20% below its all-time high of R69,2-billion in 1981. It is only now back at the level of 1989. It has, however, recovered considerably from its low point of R46-billion in 1993. Most encouraging, notes Nedcor economist Kevin Lings, is that this recovery is mainly the result of a significant expansion of capital formation by the private sector. ‘Private sector fixed investment increased by an annualised 13,7% in the second quarter of 1995 and by 9% in the first quarter.’ Investment by public authorities has dropped from around 23% of total investment in South Africa during 1985 to 14% in 1994. Within the private sector investment is dominated by the manufacturing sector whose contribution to total investment rose from 15,3% in 1985 to 25,3% in 1994. The contribution from financial services was 24,9 % in 1994. Big questions, however, remain over the sustainability of gdfi growth and its ability to expand economic output and generate jobs. Uncertainty over South Africa’s future is still far too tenuous for investors to commit the sums of money that will generate the type of real economic activity to meet South Africa’s huge reconstruction and development demands. But gdfi is, for the moment, moving in a positive
The trend in gdfi is clear. Community, social and electricity/gas/water projects are beginning to take an increasing proportion of total gdfi. They now account for 12% and 9% respectively of gdfi. Capital spending on Reconstruction and Development Programme related projects, which has up to now been far slower than many expected, should begin to accelerate as the administrative structures are now more in place. In addition, Lings notes ‘that while capital spending on big projects will remain significant, there is meaningful evidence to suggest a sizeable increase in smaller private sector projects. Spending has become far more broadly based, with capital formation occurring across a wider range of industries.’ Fixed investment spending is an important contributor to economic growth, both directly and indirectly through increased economic capacity and improved competitiveness.