Investors lose confidence in SA markets

Published: 30 June 2013

AS US President Barack Obama jetted into town on Friday, the diplomatic talk was about how South Africa could use the visit to bolster trade ties.

The US was a "major export market for South African products and an important source of foreign direct investment", said International Relations Minister Maite Nkoana-Mashabane, emphasising the importance of Obama's visit as a way of reinforcing this relationship.

But this appeared to be just diplomatic-speak. According to two reports this week, South Africa slid down the list of foreign direct investment (FDI) destinations, and the omens to reverse this do not look good.

Not only did South Africa get less FDI than its peers last year, but investor confidence in the country is waning.

Unctad's World Investment Report 2013 showed South Africa got only $4.57bn in FDI last year, 24% down on the previous year's $6bn.

This performance was confirmed by the AT Kearney report, which showed that South Africa had dropped four places in the latest FDI confidence index, from 11th to 15th of 28 countries surveyed.

Significantly, this placed South Africa below its Brics peers, China (now second behind the US), Brazil (third), India (fifth) and Russia (11th).

Nonetheless, thanks to South Africa's size, it still attracted the third-most investment on the continent after Nigeria and Mozambique.

"Africa is one of the few regions to enjoy year-on-year growth in FDI inflows since 2010," the report said.

The only problem is that South Africa is losing out to its neighbours.

Jorge Maia, head of research at the Industrial Development Corporation, said the fall in FDI was largely due to a $1bn effect of one single deal — Rio Tinto and Anglo American's sale of shares in Palabora Mining, which owns the country's only copper refinery.

The silver lining of South Africa's fall from grace was that whereas investment in Nigeria and Mozambique was largely in oil, gas and mining, investment in South Africa was more diverse — in pharmaceuticals, mining, finance, manufacturing and tourism.

Another silver lining was that the investments were in new businesses such as renewable energy companies, rather than simply foreign investors arriving and buying out existing businesses.

Said Maia: "This development is very welcome. In the past, FDI inflows were underpinned by large mergers and acquisitions. These are the kind of investments we need."

Mr Obama's visit could spur more investments of this sort, especially if President Jacob Zuma can lobby him for an extension of the trade deal governed by the African Growth and Opportunity Act (Agoa).

Agoa is meant to expire in 2015, but Trade and Industry Minister Rob Davies called this week for a "rollover" of the act of 15 to 20 years.

"South Africa has been a beneficiary of Agoa, but we also think that Agoa is a very significant instrument to benefit the US, not least because it is a widely appreciated measure by the US, which builds the US a high degree of goodwill in its relations with other countries on the African continent," said Davies.

Mr Nkoana-Mashabane also spoke this week of the need to extend the trade deal, saying: "We believe that this will assist in dealing with the effects of slow economic growth and growing unemployment in both our countries."

Although South Africa is often an afterthought for US investors, there is considerable trade between the countries. In 2011 it reached R130bn.

More than 600 US companies trade in South Africa and hire more than 12000 people.

Some of the biggest FDI deals in South Africa were also done by US firms, including the R25bn purchase of Edgars Stores by Bain Capital in 2007, the $1.2bn investment by Paulson & Co in AngloGold Ashanti in 2009, and WalMart's investment in Massmart in 2011.

Cecily Carmona, principal at AT Kearney, said the "investment perception for South Africa has declined as a result of sluggish growth prospects and the labour unrest in the mining sector".

Ms Carmona said that a steep improvement in confidence in markets like Japan and France "caused investors to look there, rather than South Africa".

Local pundits appear to agree with this prognosis.

Drikus Combrinck, portfolio manager at PSGKonsult, said South Africa's competitiveness had dropped sharply over the past five years, sparking a fall in economic growth and foreign investment.

"South Africa's weakness is that we have a structural competitive disadvantage in terms of labour and infrastructure that causes the country to grow below its potential.

"From an infrastructure point of view, the country is running at full capacity. Whether it's roads, water and sanitation infrastructure, there is little extra capacity that will enable faster growth.

From a labour perspective, the lack of adequate skills in our education and training system puts us at a significant disadvantage in attracting investment," he said.

He said that when labour unions pushed for higher-than-inflation wage hikes, the price of labour spiked, so it was not surprising the country was less attractive to foreign investors.

However, investors in South Africa's burgeoning renewable energy sector are defying this gloomy outlook.

Google recently announced a R103m investment in the Jasper power project, a 96MW solar photovoltaic plant near Upington.

A report by the Pew Charitable Trust said South Africa's renewable energy sector grew by a massive 20000% last year to reach $5.5bn.

Stanlib has set up an African Infrastructure Private Equity Fund to exploit this market, using R500m in seed capital.

Andy Louw, the fund's portfolio manager, said "the government's competent roll-out of the renewable energy programme has increased investor confidence".

"What investors need to see is whether they will get their money at the end of the day. For example, the government has stated explicitly that Sanral's creditors will be paid whether e-tolls are implemented or not," said Mr Louw.

"This gives investors confidence that this is a country that honours its debts."

- This article was first published in Sunday Times: Business Times