investors
Donna Block
President-elect Thabo Mbeki is frequently quoted saying, ”It’s time to get to work,” and foreign investors are keen to see he if keeps his word.
Most economists and Africa watchers agree that direct foreign investment – investment in resident enterprises – will stay on the sidelines as investors take a wait-and-see attitude before making any new commitments in South Africa.
The head of one New York investment firm commented: ”It’s not as if we didn’t know who the new president would be, but Cabinet appointments are unclear and implementation of economic policy will be critical.”
The appointment of the new Cabinet is of major concern to foreign investors, especially that of the minister of finance. They are also looking closely at the appointments for safety and security, education and labour.
Foreign direct investment (FDI) is important to South Africa because it is one of the major forces that can drive economic growth in the country and the continent. FDI brings in equity financing, which helps increase production and growth, increases employment opportunities, and brings in new and innovative management techniques, technology and skills.
According to FBC Fidelity Investment Bank’s Economic Perspectives, FDI also generates ”spillover benefits such as stimulation of competition, higher-quality standards, higher productivity and wages”.
Unlike the ”hot money” that flows in and out of the stock and bond markets from foreign speculators, FDI has been slower in making its way into the country. Reserve Bank Governor Chris Stals noted at a recent briefing that little of the money that has flowed into the country in the past five years made it into ”bricks and mortar”. There are major concerns that are keeping these investors out – crime, corruption, high real interest rates and an unwieldy tax structure.
Mike Schussler, an economist at FBC Fidelity, said that in addition to these factors, privatisation was taking longer than expected and South Africa’s savings rate is one of the lowest in the world.
The possibility that the African National Congress will achieve a two-thirds majority has also caused some anxiety among foreign investors. Mbeki has been working diligently to allay these fears. He has made it clear that attracting foreign investment is a priority and stressed that the ANC had no plans to use a two-thirds majority to alter the Constitution or to limit the independence of the Reserve Bank.
Though many investors are exercising caution, confidence that the Mbeki administration will address the concerns of foreign investors is high. The proposed establishment of an advisory council on foreign investment, which would include international businesspeople to help stimulate capital inflows, has added to investor confidence.
Foreign investors have been pleasantly surprised by the government’s determination to fight inflation and adopt a conservative approach to spending, and the political stability of the last five years is definitely a plus.
However, speculators – who were the undisputed winners during last year’s rand crisis – continue to kindle suspicions that the ANC will do away with conservative spending controls and embark on state- sponsored expansion to lift growth and create jobs.
Because South Africa is a capital-poor country, it gives us little choice but to remain dependent on foreign capital inflows to fulfil investment needs. The other choice is to institute policies that will raise the level of domestic savings, or the country will have to live with poor economic growth rates.
John Clemmow, head of African research for Investec Securities in London, said: ”Foreign investment will wait until there are clear signs of growth in the economy. This will require a change in domestic policy settings away from those designed to appease forex traders and towards those more attuned to the needs of the general public. I fully expect this to happen.”