The IMF’s latest World Economic Outlook includes a special focus on the slow recovery in private fixed investment after its sharp slump in the wake of the global financial crisis. The report reviews experiences across the world and specifically addresses the reasons for this state of affairs and what policy steps can be taken to reverse it. It refers to South Africa only in passing, requiring the details to be filled in.
According to the report the slump in private fixed investment is mainly an advanced-economy phenomenon and in line with the post-crisis decline in output (except for the European peripheral countries, which fared worst because of financial constraints and policy uncertainty), with emerging and developing economies as a group holding up quite well.
However, if China (which in 2009 embarked on an aggressive capital expenditure stimulatory policy to counter the effects of the global recession on its economy) is excluded from this group, the rest of the emerging and developing universe shows a similar lethargic recovery. Reasons vary from country to country but include spillovers from weak global demand and lower commodity prices, as well as financial constraints.
South Africa also follows this pattern, with private investment falling cumulatively by approximately 15% from its peak in 2008, compared with a 25% decline in the advanced economies. Private investment has nevertheless declined from 70% of total investment in 2007 to 63% in 2014.
The main reason for the private sector investment slump is deemed to be the weakness in demand (with a large part of the loss in output now regarded as permanent) and the uncertainty regarding the outlook for the future trend in demand growth. The investment slump therefore interacts with the secular stagnation hypothesis, creating a negative feedback loop. Weak demand because of lower potential economic growth depresses investment spending by businesses, with lower investment spending in turn contributing to the decline in potential growth rates. Weakness in public investment has also played a role in depressing private investment in some countries.
In the case of South Africa the general weakness in the economy has certainly also played a part in depressing investment by private businesses. Although the 2009 recession was relatively shallow, the subsequent inability of the economy to record a robust recovery and the slowdown in growth in the past three years have claimed their toll. The realisation that South Africa’s potential growth rate has suffered long-term damage and now stands at a mere 2 – 2,5% will naturally cause businesses to reassess their expansion plans.
According to the IMF other reasons appear to be of lesser importance. Financial constraints (in particular credit availability) have mostly affected industries that are relatively more dependent on external finance.
Much is made of policy uncertainty in particular but the report concludes that this has played a role only in a minority of cases (especially sectors characterised by lumpy, irreversible investments) as the growth in private sector fixed investment in general has not lagged GDP growth.
However, the IMF believes that reasons other than weak demand are continuing to play a significant role in restraining private investment in South Africa. It specifically mentions structural and infrastructure bottlenecks (of which the availability of electricity is the most telling in the short term), weak business confidence and political uncertainty (probably meaning policy uncertainty).
As far as the latter is concerned the ideological inconsistency in government is often mentioned. Although the National Development Plan has ostensibly been adopted as blueprint for policy formulation, its implementation remains weak and fragmented and different sections of government tend to interpret it to suit their own agendas.
As for the sectoral impact of policy uncertainty, agriculture, mining and manufacturing are arguably among the sectors being worst affected. Although fixed investment in the mining sector has held up well so far (existing projects naturally have to continue and ongoing investment is needed to keep up production), the sharp decline in mineral exploration, now standing at a quarter of its level in 2007, is striking. In agriculture and manufacturing the fixed capital stock has stagnated at pre-crisis levels.
In many countries weak investment spending by businesses contrasts with the drop in the cost of capital and buoyant stock markets in particular. However, the report neglects to mention that weak investment spending has been a contributing factor to the performance of stock markets by allowing companies to increase dividends by more than what their operational performance would justify and to allocate significant sums to buying back their own shares, thereby raising earnings-per-share numbers and keeping valuation measures such as price-earnings ratios within reasonable bounds while share prices repeatedly reach new records. A report in the Financial Times of 12 April 2015 indicated that US companies intend to return approximately $1 trillion to shareholders this year due to a lack of attractive investment opportunities.
The JSE has likewise been buoyant, moving in step with international markets and outperforming the economy. One can only hope that the optimism expressed in rising share prices will eventually spill over into an improvement in business activity. For this to happen the immediate issues to address are bolstering the economy’s potential growth rate and restoring business confidence.
Jac Laubscher Economic Advisor: Sanlam Limited