Johannesburg – Despite exiting the technical recession South Africa’s investment levels remain depressed, leading economists have warned.
Over the past year fixed investment spending has declined 1.1%, and the country is essentially in a low intensity recession, said Stanlib chief economist Kevin Lings.
Gross fixed capital formation decreased from a low growth of 1.3% in the first quarter of the year, to a -2.6% contraction in the second quarter, according to data released by Statistics South Africa (StatsSA) this past week. Fixed investment spending includes spend by both the private and public sector.
For 2016, fixed investment spending declined 3.9% year-on-year, it is unlikely that a negative outcome in 2017 will be avoided, explained Lings .
He noted that many large corporates have robust balance sheets, but low confidence levels are behind the decision not to invest towards expansion. “This is despite a relatively low cost of capital, and a fairly robust global economic backdrop.”
The lack of confidence stems from concerns about government’s policy direction, rising corruption, social instability and the negative outlook for credit ratings, he explained.
But, even though investment is not driven towards expansion, companies are investing towards maintenance.
“This suggests that many businesses are essentially ‘treading water’ waiting for economic and policy conditions to improve on a sustainable basis before committing their limited capital to capacity building,” said Lings.
More needs to be done to encourage a “business friendly” environment as investment would lead to the desired job creation. If fixed investment spending had to increase between 4% to 6% per year, South African GDP growth would be around 2.5%, he added.
Maarten Ackerman, chief economist at Citadel echoed views that the decline in fixed investment was a reflection of low confidence levels. “It is worrying to see the significant decline in construction, residential and non-residential buildings, an indication that future confidence in the economy and policy remains low.”
The statistics showed that investment in machinery and equipment had grown 2.9% only contributing 0.9 of a percentage point to gross fixed capital formation. A -13% decline in residential buildings was reported, contributing -1.3 percentage points to the overall decline in investment.
Politics knock sentiments
In the latest risk update, Investec chief economist Annabel Bishop highlighted that politics, particularly conflicting political and economic policy proposals have negatively impacted sentiment levels.
With focus on the national election in 2019 and the ANC elective conference in December, it appears little is expected to change to boost GDP growth over the period, said Bishop.
The remaining key investment grade ratings are on a negative outlook, on the last level of investment grade. The next move could possibly be a downgrade to junk status unless the outlook changes to neutral or becomes positive, she explained.
Nomura emerging markets economist Peter Attard Montalto explained that political and regulatory uncertainty would have a negative impact on the country’s future growth potential.
“We therefore still see a long tail from the impact of political and regulatory uncertainty on the economy and a prolonged, if more narrowly targeted impact of Cabinet reshuffles particularly on private sector investment,” he said.
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