Business confidence in South Africa may be at a nine-year high but a more significant indicator is gross fixed capital formation, which is dropping, says Chamber of Commerce & Industry economist Richard Downing.
“Gross fixed capital formation is absolutely essential for a productive economy,” says Downing, who compiles the chamber’s business confidence index.
Fixed capital formation refers to investments in physical assets such as roads, water infrastructure, electricity and factories to facilitate production that will grow GDP. Business confidence, on the other hand, is based on a short term, day-to-day assessment by business of what’s happening in the economy.
“The latest business confidence index reflects a perception within business that the GNU is positive for certain developments in the economy like the share market and share prices which make a return on investment likely.”
Gross fixed capital formation is based on an assessment by investors of what is going to happen in the country and economy over period five years or longer.
“Their decision to invest or not is based on policies or policy options they see the government pursuing.”
The Employment Equity Amendment Act, which came into effect on January 1 and empowers the minister of employment & labour to set race quotas for businesses employing more than 50 people, is a prime example of a policy that is likely to deter investment in gross fixed capital formation, says Downing.
“There are a lot of examples of the damage this has done to economies all over the world, so it is difficult to understand what the reasoning is. It’s a race-based political target you’re setting. There is no economic sense to it at all.
“You need the economy to grow, and then you can make these types of decisions to close the equity gap.”
Without gross fixed capital formation the government’s 3%-plus GDP growth target is not going to be met any time soon, let alone by 2025 as President Cyril Ramaphosa confidently predicted last year, Downing says.
“To achieve 3% this year or next year you need 25% to 30% fixed investment as a percentage of GDP. At the moment this stands at 14.9% so there’s no way you can achieve 3% growth with fixed capital stock where it is at the moment.”
There is no more dire example of this than Transnet, which says it will need R14bn a year to fix its rail infrastructure. Electricity is being sorted out to some extent but there are a lot of structural issues caused by not investing in the physical infrastructure and assets needed to grow an economy.
“We need foreign capital, so we must make South Africa a favourable destination for foreign investors.”
What [Parks Tau, minister of trade, industry & competition, is] telling business is, ‘If you’re successful, you’re going to pay extra tax.’ It makes no sense in terms of business confidence
— Richard Downing, Chamber of Commerce & Industry economist
Fixed capital formation has declined for the past two years, Downing says.
“If you don’t correct this type of positioning where you as the government decide what is good for the economy, and how business should structure their employees and that type of nonsense, then you’re running into trouble. This is not something government officials sitting in an office can determine.
“Investors in fixed assets must have a belief that policy will enable a decent return on their investment for at least 10 to 15 years and even longer. That is critical.”
The National Development Plan of 2012 set a gross fixed capital formation target of 30% of GDP by 2030.
“If we’re to get anywhere close we’ll have to really move on structural issues and leave the politics behind. Otherwise forget it, it will be a null and void type of exercise.”
The recently stated aim of Parks Tau, minister of trade, industry & competition, of making businesses hand over 3% of net post-tax profits to a new R100bn empowerment fund is a direct tax on business success, he says.
“What he’s telling business is, ‘If you’re successful, you’re going to pay extra tax.’ It makes no sense in terms of business confidence, and it won't create the fixed capital investment we need, or convince foreign capital to come to South Africa. There are a lot of other places where this capital can go. The government needs to accept this.”
Such policies show no understanding of how urgent it is for South Africa to do whatever it takes to attract more, “much, much more”, fixed investment.
“You have to look at the president’s economic advisory committee and ask if he or his ministers pay any attention to its advice at all,” Downing says.
What about warnings that structural changes and capital-intensive growth will cost jobs?
“The economy has a wonderful way of correcting itself and providing for people who lose their jobs because of more capital-intensive production processes,” he says.
The kind of policy decisions coming from the DTIC will create far bigger trouble leading to far more unemployment, Downing says.
“That is what we’re sitting with today. The government is interfering with the decision-making process of the investor, and that is where the problem lies from a gross fixed capital formation point of view.”
Instead of doubling down on outdated, economically ruinous policies the government needs to prioritise service delivery, fix dysfunctional municipalities and provide roads, electricity and water.
“There’s no way out of making these structural adjustments, which we should have started years ago. For that we need fixed, direct investment. It’s critical.
“The capital we generate from domestic savings in South Africa is about 13%, so we need 12% foreign capital flowing in to the country. To see that happening you must convince foreign investors to come into the country because there are prospects 10 years ahead,” Downing says.
“To reach the NDP’s 30% fixed investment target by 2030 will take a total turnaround of what government thinking is at the moment as indicated by ... Tau.”
Making it even harder now is steel manufacturer ArcelorMittal’s plant closures forced on it by government policy. “This will have knock-on effects all over the place.”
Failure to reach the NDP target could be socially and politically “catastrophic”, Downing says.
“If the economy is not performing a hell of a lot better you can be sure there will be consequences.”
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