BRIAN KANTOR: Where could the catalyst for faster growth come from?

The Covid-19 lockdowns led to some unusual economic developments in SA. Among them was that gross savings came to exceed all spending on new capital goods such as plant and equipment. As a result, already capital-light SA became an exporter of scarce savings.

Last year normal service was resumed, capex increased by more than savings and SA resumed net imports of foreign capital to fund the savings deficit. This also meant by dint of the national income accounting conventions that all SA incomes fell short of all spending in 2023, and the current account of the balance of payments went into deficit to balance the shortage of supply over demand, equivalent to a modest 1.6% of GDP. 

Is this good or bad news? Clearly the more capital SA can attract from foreign savers the better the economy performs, particularly if it is used to fund productivity and income advancing plant and equipment and R&D. Yet both SA savings and capex have fallen to unsatisfactorily low proportions of total income. The savings and capex rates, now around 15% of GDP, have been in decline. Yet during the strong growth years between 2002 and 2008 capex again surged, the savings rate remained subdued, and foreign capital flowed in to realise faster growth.

The case for faster growth in SA incomes and expenditure must be based on higher levels of capex, and households spending more on the goods and services supplied by the SA producers. Without support from interest rate-dependent household spending — now decidedly lacking — private businesses will not invest enough. Thus any immediate increase in the savings rate (less spending) would neither be welcome nor realistic.

The extra debt raised by households to fund their homes, cars and appliances largely cancels out their very significant contributions to retirement funds. Thus business savings (cash retained out of earnings) account for all of gross savings in SA. In the interest of faster growth for SA we would prefer businesses to spend more, rely less on their own free cash flow, and augment their capex by raising debt or equity capital, including from abroad, as they did between 2002 and 2008.

Negative free cash flow would be good for business and economic growth, as it was between 2002 and 2008. But where is the catalyst for a virtuous cycle of more household spending, and more profitable businesses willing to raise their capex and labour forces to generate higher incomes for their workers to come from? 

Over 70% of all capex in SA is undertaken by private business enterprises. Public corporations and government’s share has fallen away in recent years. It is now sits at 28% after having risen to well over 30% a decade ago. The Medupi and Kusile power plants, and the unsuitable Chinese locomotives, were extremely expensive projects that did not add to electricity generated or tonnes carried. It is not enough to spend more on essential infrastructure. It must be capital well spent, as the private sector must do to survive.

Eskom and Transnet have failed the economic survival test — earning a positive return on capital. The government now recognises this, and the privately managed alternative is very much in prospect. The economic case for investing in SA infrastructure is strong, and the private capital to fund such capex would be readily available from local and foreign sources.

Private equity managers with access to institutional capital would be eager participants, and the right terms to attract capital would not be onerous. They would have to guarantee inflation-linked utility charges, charges would need to be based on a realistic risk-adjusted return on the capital invested, and any private business or private-public partnership so engaged would have to be left largely free to sign their own procurement contracts.

This could be the elusive catalyst for growth.

• Kantor is head of the research institute at Investec Wealth & Investment. He writes in his personal capacity.