At a busy investment conference in Johannesburg in October, a procession of international business leaders took to the stage alongside President Cyril Ramaphosa to unveil billions of dollars worth of projects in South Africa.
From factory openings and restaurant chain expansions to support for the crucial mining, auto and telecoms industries, the pledges were tailor-made with one goal in mind – to support Ramaphosa’s eye-catching plan to attract $100bn in new investments.
As South Africa flounders amid recession, high unemployment and the resignation of finance minister Nhlanhla Nene, the investment target has assumed critical importance for a president desperately in need of good news to bolster his economic reputation in the run up to 2019 elections. With so much at stake, the government is aggressively promoting the scheme as a way to reignite the waning business excitement that greeted Ramaphosa’s accession to the presidency.
Ramaphosa says that the government is over halfway towards its total, with $20bn announced at the Johannesburg conference alone and billions more emerging from bilateral meetings with international partners. The list of planned investments is replete with big names, among them Nestlé, McDonald’s and Vedanta, all of whom have pledged to expand their footprint in the country in the years ahead.
Are the pledges really new?
Yet critics question whether the target is attracting an inflow of new capital or merely recycling previous pledges to distract from poor growth and slow-moving structural reform. Government ministers have moved to dispel suggestions that many of the investments are pre-existing expansion plans or that the multi-year nature of some of the investments could allow companies to renege on pledges if the growth outlook continues to sour.
“These are firm investment commitments, not just pledges,” insisted trade and industry minister Rob Davies in an interview with local media. “A number of business leaders have stood up before the president and made these commitments, and I do not think they would go back on their word.”
The reality is likely to be more mixed. While some investments appear set to break new ground – Proctor & Gamble says it will earmark R300m ($21.1m) for a new plant while local drug firm Aspen intends to boost its factory with a $232m investment – other pledges will sound wearily familiar to those with exposure to the South African market. Despite their inclusion in the scheme, the expansion plans of firms with a historical footprint in South Africa, including miner Anglo-American, publisher Naspers and telecoms giant Vodacom, are unlikely to convince markets that an exciting business renaissance is underway.
“These are existing CAPEX and OPEX expenditures that in many cases (like Anglo) were already known to analysts before hand. We also need to differentiate between ‘new new’ investment that has been committed that wouldn’t otherwise be, and investment that would naturally have occurred anyway between 2021 and 2023, say during a normal cyclical recovery. That would have been around $48bn anyway in the economy,” says Peter Attard Montalto, head of capital markets research at Intellidex.
Ramaphosa himself has alluded to the conditional nature of much of the investment, admitting that pledges will not translate to fully formed investments without a government commitment to “remove whatever blockages stand in the way of these investments”.
For many would-be investors, those blockages remain severe. From uncertainty stemming from the constant replacement of finance ministers and fears over corruption, factionalism and economic populism in the ANC, investors do not have to look far for reasons for pessimism.
Fears of downgrade
While Ramaphosa supporters insist that today’s underperformance is a residual legacy of the destructive Zuma era, finance minister Tito Mboweni’s mid-term statement, which predicted a 4% increase in the budget deficit as a result of falling tax collection and higher revenues, suggests that the current government needs to do much more to boost market confidence. Ratings agency S&P warns of the possibility of a credit downgrade if the government does not speed the pace of fiscal consolidation.
The government insists that it is alive to such concerns. In September, Ramaphosa launched a $3.5bn economic stimulus package intended to reprioritise government spending, roll out reforms in key sectors, and fund revenue collection efforts. His early efforts to reform state-owned enterprises, tackle corruption and appoint credible allies to crucial economic portfolios have gained plaudits among a business community alienated by the stagnation of the Zuma years. But his partially sketched out plans for comprehensive land reform, including expropriation without compensation of white-owned farmland, are having a “chilling” effect on investment, according to S&P. South African private sector activity shrank at its fastest rate in four years in October, according to the Standard Bank Purchasing Managers’ Index compiled by IHS Markit.
“There needs to be a larger rethink of an economic transition to a low barrier to entry economy, and sort out education. This isn’t even on the table however,” says Attard Montalto.
Companies that have pledged multi-year expansion plans as part of Ramaphosa’s $100bn investment scheme could take a wait-and-see attitude to such crucial issues before deciding to stump up the cash for later investment phases. But if there is scepticism around both the numbers and the novelty of the investments, few doubt the sincerity of the president’s ambition to attract significant capital to an economy crying out for investment. Even if some of the newly announced projects are already pencilled in or merely represent a logical continuation of existing plans, the fact that the government is headed by a former investor who actively courts the business community could have a positive effect on wider sentiment. Despite the economic gloom, investors have reason to believe that the government is once again listening to their concerns after years of neglect – even if much work remains.
“The process is however a huge PR success and the upside for growth is if animal spirits can be reignited and we get ‘new new’ investment, that genuinely helps lift growth. There is no sign of this yet however,” says Attard Montalto.