The news of substantial inflows of Foreign Direct Investment (FDI) comes like a silver line in a dark cloud against the backdrop of pandemic –battered economy of South Africa.
Needless to say that it is the most welcoming sign that reaffirms the confidence on the part of prospective investors / foreign entities in the South African economy in general and in its ability to speedy recover in particular.
According to the Central Bank of SA, there are foreign direct investment (FDI) inflows of 16.0 billion rand ($1.07 billion) in the 4Q 2020 from outflows of 12.2 billion rand in the third.
The South African Reserve Bank stated in its Quarterly Bulletin that the inflows in the latest quarter were due to non-resident parent entities increasing equity investments and also offering loans to domestic subsidiaries.
Inflow of FDIs
The country recorded FDI inflows of 51.1 billion rand for all 2020, decline from inflows of 74.0 billion rand in 2019.
Portfolio investments, a substantial amounts of buying and selling of securities such as bonds and shares, contributed to inflows of 24.1 billion rand in the October-December quarter as opposed to the outflows of 39.5 billion rand the quarter before.
However, in 2019, the annual portfolio outflows, were at 159.3 billion rand compared to inflows of 87.5 billion rand of the same year.
“While non-residents’ disposal of domestic equity securities increased from 2019 to 2020, the largest change in the financial account came from their disposal of domestic debt securities of 74.6 billion rand in 2020,” the central bank stated.
“The significant reversal in non-resident flows of domestic debt securities can be attributed to the increased risk attached to South African government debt as a result of the deterioration in government finances,” the bank stated.
In SA, the debt to GDP ratio has become an issue as the government struggles to reduce its ratio of debt to GDP which currently up to 81.8% in 2020 from 63.5% in 2019. This was even without increasing the government revenues as the economy failed to grow.
Even though the country’s pre-pandemic forecast for debt-to-GDP ratio for 2020 was set high at 65.6 percent, the pandemic and other supporting measures to stimulate the economy compelled the government to breach that set spending ceiling and to expand its borrowings. This inevitably resulted in increasing the forecasted debt-to-GDP ratio to 80.5 percent for 2020.
Obviously, the strain of higher debt could significantly hamper a country’s long-term growth prospects. In a Study, the World Bank found that in emerging markets, the loss of annual real growth is 0.02 percentage points for each percentage point over a 64 percent debt-to-GDP ratio.
Confidence building
What is important is for South Africa to build confidence in its proposed fiscal consolidation path. Early this year, Moody’s downgraded South Africa without an investment grade rating for the first time.
This move exert pressure on domestic capital markets, eroding confidence in the South African economy, which reaffirmed in higher bond yields, exchange rate depreciation, and by extension, increased borrowing costs. As a result, the market was skeptic about the fiscal consolidation path presented in the most recent budget for 2020/2021.
Besides the President’s Economic Advisory Council has acknowledged the fact that that the fiscal consolidation path suggested by the government is both undesirable and unconvincing. Therefore, it is noteworthy for the South African authorities to seriously consider the proposed structural reforms in the economy, reducing the public wage bill and such measures indicate the government’s willingness to fiscal consolidation.
SA government also should take into consideration the fact that all three major ratings agencies rank the country’s debt at sub-investment level, or junk, citing weak growth and the execution risk in National Treasury’s plan to reduce public sector wages or in other words, government’s spending.
Therefore, the need of the hour is to make structural reforms in the SA economy to make it more competitive to attract more and more FDIs and thereby, create not only gainful employments, but also wealth and business opportunities.
