While “Ramaphoria” has started to wane, there remains a prevalent narrative in the public domain that former president Jacob Zuma was the cause and, in turn, that President Cyril Ramaphosa may cure the country’s economic malaise.
This thinking places too much emphasis on leadership — important as it is — and neglects to focus on other factors that affect the market.
In April, Ramaphosa announced an “ambitious” drive to spur economic growth by attracting “at least US$100-billion” investment over the next five years. A major theme of his presidency has been reaching out to foreign investors, such as on his recent trip to Canada. Significant foreign direct investment (FDI) inflows are necessary to achieve the 5.4% gross domestic product (GDP) growth rate envisioned by the National Development Plan.
South Africa has to attract these capital inflows after years of reputational damage. From 2009 to 2017, the country dropped 16 spots in the World Economic Forums’ (WEF) Global Competitiveness survey. South Africa barely remains in the top half of the 137-country index.
South Africa’s deteriorated international standing is often blamed on political risk factors linked to Zuma’s presidency. Respondents to the WEF survey, for example, listed corruption and government instability as major factors inhibiting business. Similarly, the International Monetary Fund, ratings agencies and even national treasury noted the harmful effect of political risks during Zuma’s tenure.
In contrast, anecdotal evidence suggests that Ramaphosa’s presidency so far has helped to revive the country’s image and sparked renewed foreign investor interest.
Influential investment bank Goldman Sachs, for instance, described South Africa as the “big emerging market story” for 2018. However, at this stage there is little hard evidence that “Ramaphoria” has or will result in significant investment. The recent 2.2% quarter-on-quarter GDP contraction is a case in point.
In his defence, Ramaphosa’s presidency is still in its infancy and it will take time for economic indicators to reflect reforms. Nevertheless, observers should not expect the country’s improved image and political risk environment to translate to higher investment rates any time soon.
In South Africa’s recent past, empirical data does not show a correlation between political risk and FDI inflows. This conflicts with conventional wisdom that assumes a reverse relationship between political risk and FDI; high political risk results in lower FDI and vice versa.
Instead, a study on South Africa covering the 1984-2015 period found no statistically meaningful relationship between foreign investment inflows — as an inflation-adjusted number or as a percentage of GDP — and political risk. Consequently, claiming that Zuma is to blame — or reversely that Ramaphosa will solve — South Africa’s FDI woes is not a given. This line of thought fails to illustrate the full-range of international and domestic factors that bear on foreign investment.
A dynamic and complex interplay of local and global issues influence multinational corporations’ investment decisions. Each firm has its own unique return on investment calculations, but there are a range of general factors that all feed into decision-making. Significant international factors include capital markets, exchange rates, trade agreements, commodity prices and rivalry between firms. South Africa, which accounts for less than half a percent of the global economy, has little ability to influence any of these factors.
Country-specific aspects, which affect FDI inflows include inflation, tax, exchange controls, GDP size, growth rates, infrastructure, labour supply and, of course, political risk. Government can influence some of the domestic factors, but many require a lot more than political will to change. Pretoria can alter fiscal policy, for instance, to attract capital but it cannot unilaterally remedy deep-seated systemic issues.
South Africa’s socio-economic environment has several well-known structural constraints that are unattractive to most foreign investors. These include problematic state-owned enterprises, low GDP growth and domestic savings levels, high market concentration and unemployment levels, an inadequately educated workforce, insufficient investment in fixed capital and pervasive inequality. The ruling party’s lack of a unified economic vision complicates the Union Buildings’ ability to address these systemic challenges. Major policy decisions that are closely watched by potential investors can drag on for years, such as the debate around land and mineral resources.
Ramaphosa’s $100-billion target is commendable and government should take steps to attract investment.
Still, South Africans should not expect FDI to increase merely because of new leadership, lower political risk levels and improved offshore perceptions. These are helpful but not sufficient conditions to attract investment, as historic FDI-political risk data illustrate. In the medium term, factors mostly outside Pretoria’s control will determine whether Ramaphosa makes meaningful progress towards his 2022 investment target. In the long term, the president must address structural economic constraints and hope for a favorable international environment.
As with so many of South Africa’s most vexing challenges, attracting FDI is a multifaceted, interrelated and deep-seated challenge. There are no simple solutions and it is not within the presidency’s control alone.
Emile Ormond is a socio-political analyst. This article is partly based on his MBA dissertation; The Impact of Political Risk on FDI Inflows: A Longitudinal Study of South Africa (1984-2015) at Unisa’s Graduate School of Business Leadership.