economy
Belinda Beresford South Africans are not good at saving, an unfortunate situation for a developing country, which needs infusions of foreign money to create economic growth. More precisely, South Africa needs foreign direct investment (FDI), the dearth of which is the Achilles heel of the country’s economic recovery. FDI is money that is actually invested in physical South Africa, rather than in the slightly more virtual world of the financial markets. Investment in the latter are considered “hot money”, because it can leave the country on the proverbial push of a button by fund managers or investors. Such decisions can depend on sentiment, or perceptions of emerging markets as whole, rather than being based on the realities of South Africa. Some economists have voiced concern about the impact of such portfolio flows, since they can add a significant element of volatility to emerging markets. FDI, on the other hand, is money that is (theoretically) here to stay and that tends to be more cautiously invested. The balance between risk and return alters if the money is going to be locked in for years. Investors considering building a factory in an emerging market will need to carefully consider whether the potential lower costs, and local markets, will outweigh risks such as falling currencies, not to mention political and economic instability and uncertainty. It is to allay such risks that the South African government has so determinedly maintained conservative economic policies. Unfortunately such efforts have not proved that successful. According to consultancy BusinessMap, FDI has been declining over the last year from a peak quarterly average of R6,272-million in 1999. So far in 2000 the quarterly average has been R2,596-million. But in dollar terms the fall has been even worse – from $1,023-billion in 1999 to just $388-million this year. As BusinessMap researcher Karen Heese points out, a particularly problematic issue for South Africa is the large extent that FDI inflows are the result of major transactions rather than a steady stream of smaller investments. When such deals are cancelled or delayed, as has happened with the controversy over the award of the third cellular licence to Cell C, it has an immense impact. Another example is the putative merger between Gold Fields and Canadian company Franco-Nevada, which was blocked by the finance minister on the grounds that it did not meet the exchange control requirements for offshore listings and that it would erode South Africa’s tax base. If that had gone ahead, the first six months of this year would have seen FDI of almost R20- billion – against R25-billion in the whole of last year. The quarterly average for this year would have been R4,139-million – compared to the R2,596-million that actually flowed in. Another sign of concern was that FDI has tended not to be brand-new projects, but rather expansions of existing operations. BusinessMap records that of the money that did come in, motor manufacturing and components were the leading investment. Expansions by Daimler Chrysler, Ford SA and London Clubs all had an impact. The leading sector was motor vehicles and components, followed by professional services, and then hotel, leisure and gaming. The poor FDI figures for this year are partly a reflection of the decrease in government activity, such as privatisation, which attracts foreign inflows. The planned privatisations next year, including chunks of Telkom, should see a major rise in FDI figures. Heese says companies surveyed by BusinessMap attributed concerns to a number of factors, including Aids, and political risk – especially relating to Zimbabwe. Relatively poor markets – and markets which are likely to get poorer over time as the HIV/Aids epidemic hits – were also a significant concern.