Is South Africa Losing Its Investment Appeal? Analyzing Decades of Declining Investment Trends

For years, South Africa has trailed its emerging market peers in economic growth, achieving only half of the growth rate seen in similar economies. According to recent analysis by the Centre for Risk Analysis, the country needs at least a 5% annual GDP growth rate over the long term to tackle severe socio-economic challenges, yet the path to achieving this remains steep.

Terence Corrigan, one of the report’s authors, stresses the importance of investment for growth. “This would require an investment level equivalent to some 30% of GDP,” he states, highlighting that South Africa has never reached this target. In fact, World Bank data reveals that since 2007, middle-income countries have consistently hit the 30% investment rate, while South Africa has only exceeded 20% once since 1994.

South Africa’s Historical Investment Struggles

South Africa’s failure to reach the necessary investment threshold underscores its economic challenges. The only time investment levels breached 20% of GDP was in 2008, during the commodities boom and the lead-up to the 2010 FIFA World Cup. This period marked a unique surge in investment; however, it was not sustained.

From 2014 to 2021, the report notes a consistent drop in annual investment, with only one exception in 2015. Although investment has risen slightly since 2022, it remains below 15% of GDP, posing a significant obstacle to South Africa’s growth prospects. In real terms, total investment declined from R796 billion in 2013 to R685.6 billion in 2023, marking a reduction of over R100 billion over the decade.

The Role of Private and Public Sector Investment

The private sector has contributed consistently to South Africa’s investment, accounting for about two-thirds of total investment each year since the 1990s. Despite accusations of an “investment strike,” data shows that private business remains a vital part of South Africa’s investment landscape, while state investment contributes around one-third.

Industry-specific investments also show a shift in focus. While finance and community services sectors continue to receive a significant portion of investment, traditional sectors like mining and manufacturing are attracting less. Agriculture, despite its prominence in government policy, received only 5.8% of total investment in 2023, consistent with its contribution to GDP.

South Africa’s Foreign Investment Challenges

Foreign investor confidence in South Africa has waned, evidenced by the decline in foreign direct investment (FDI) compared to South Africans’ investments abroad. In 2022, foreign investment into South Africa was R2.9 trillion, whereas South African investments abroad reached R3.5 trillion. This translates to a ratio of 0.83:1, a significant decline from 2005 when foreign investment outpaced local investments abroad at a ratio of 3.12:1.

Since the global financial crisis, foreign investor sentiment has not recovered fully, with the ratio remaining below 0.90. Declining investor confidence is attributed to political and economic instability, contributing to a weaker rand and prompting domestic firms to explore investment opportunities offshore.

Popular destinations for South African investments include the Netherlands (20.4%), the United Kingdom (18.2%), and the United States (14.8%), highlighting a strategic shift among South African investors seeking higher returns and stability.

Factors Affecting South Africa’s Investment Appeal

Several factors have made South Africa a less attractive investment destination. Corrigan notes that strict affirmative action policies and threats to property rights are deterring both local and foreign investors. Additionally, economic uncertainty, security issues, and policy instability have led many South African businesses to diversify their assets internationally.

Despite the negative trends, there have been some improvements. PwC’s Private Business Attractiveness Index, which assesses countries’ relative attractiveness for private businesses, ranked South Africa 23rd out of 33 in the Europe, Middle East, and Africa region in 2023, an improvement from previous years.

Moving Forward: The Need for Market-Friendly Policies

The report calls for market-friendly policies to restore investor confidence. Corrigan emphasizes that such policies are essential for driving growth, improving investment rates, and addressing the nation’s socio-economic challenges. With supportive economic reforms, South Africa could become a more competitive and attractive destination for investment, a necessary step toward achieving sustained GDP growth and socio-economic stability.

South Africa’s investment landscape presents both challenges and opportunities. With the right policies in place, the country could reverse these trends, ultimately building a more prosperous and inclusive economy.