Nedbank’s latest capital expenditure project listing report shows a dramatic fall in SA’s fixed investment activity in the first half of 2023 as power outages, rising interest rates and cost pressures weigh heavily on profitability and erode business confidence.
The survey shows that while still growing — with the value of new projects announced during the first half at an annualised R173.1bn (extrapolated to the full year) — the sharp drop from R248.5bn in 2022 and R392.7bn in 2021 flashes a red light about future investment and growth trends in the economy.
Nedbank senior economist Johannes Khosa said the reduction in new investment plans points to a deeper slowdown in 2024 and beyond. He said that electricity shortages and their adverse effects on domestic economic activity will keep business confidence subdued for some time, limiting investment in new projects.
Nedbank’s capital expenditure project listing is a record of major capital projects undertaken within SA’s borders.
The schedule includes only projects that have been announced to the public. It shows the government replaced the private sector as the major driver of new investment, with planned new projects rising to R103.4bn, accounting for 60% of the total value of new projects announced in the first half of 2023.
Not only were no new projects announced by public corporations after a flurry of announcements in previous years, the Nedbank report shows capital projects by the private sector fell to an annualised R69.78bn, amounting to about 40% of the total value of new projects announced.
Nedbank’s listing shows fixed-investment activity continued its slow recovery off a low base in the first quarter of 2023, with gross fixed capital formation rising 1.4% on a quarterly basis and 3.5% year on year.
Khosa said the quarterly rise was mainly driven by general government outlays, which were up 7%, and a slight increase in capital expenditure by public corporations at 0.8%.
He said these were probably lifted by the rebuilding of infrastructure damaged by last year’s floods in KwaZulu-Natal and investment on machinery and equipment by Eskom to improve the performance of its power stations.
The survey also shows how growth in private sector outlays slowed to only 0.2% as business confidence dwindled.
Khosa said Nedbank now expects the slowdown in capital spending to continue for the rest of 2023 and into 2024. It forecasts gross fixed capital formation to grow about 3% in 2023, down from 4.7% in 2022, reflecting the impact of projects announced in previous years that are now under way.
The boost in fixed investment will come from renewable energy generation projects and public sector infrastructure spending.
Khosa said that though Nedbank could not pick up any new projects by public corporations in the first half of the year, R236.9bn worth of projects are under way, most of which were announced in 2021.
“These involve large undertakings by Eskom, the Passenger Rail Agency of SA and the SA National Roads Agency,” he said.
The sectoral breakdown shows that in the first half of 2023 community, social and personal services dominated, with projects worth R45.3bn. Of these, 99.8% falls within the realm of the City of Cape Town’s infrastructure portfolio.
The manufacturing industry announced R24bn worth of planned projects, the most significant being AGP Africa’s R1.5bn expansion project and the second largest being BMW’s R4.2bn investment in the upgrade of its Rosslyn plant.
The electricity, gas and water industries announced projects of R9.3bn, boosted by the Grootfontein solar project valued at R5.1bn.
The project, by Scatec, involves the construction of three solar power plants with a total capacity of 273MW.
The mining and quarrying sector announced plans to invest R3.7bn. The largest project is a proposal by Sylvania Platinum and Volspruit Mining to establish an opencast platinum group metals mine.
Hume International announced plans to invest R30m in agriculture, forestry and fishing to expand its dry-store facilities.
Downside risks
North West University economics professor Raymond Parsons said the sharp drop in new investment plans suggests that the downside risks to the growth outlook in 2024 and beyond may be greater than previously expected.
Parsons said it is generally recognised that if SA is to reach growth rates that exceed 3% a year and reduce unemployment, total fixed investment needs to be about 25% of GDP. At present it is only about 14%.
“The report flashes a strong red light about future investment and growth trends in the economy,” Parsons said. “This is particularly so as it is private fixed investment that has taken the biggest knock.”
It is widely accepted that the private sector is the biggest single creator of jobs in the economy, he said.
The overarching remedy is to ensure the energy challenge is more adequately addressed and the implementation of essential structural reforms is expedited.
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