‘SA’s private sector is not on an investment strike’

Capital investment by South Africa’s private sector is on the up and shows that the private sector is not on an “investment strike”, says Annabel Bishop, chief economist at Investec.

She was speaking to Moneyweb on the sidelines of the Business Unity SA (Busa) annual Economic Indaba this week in Sandton. Bishop was also a participant in one of the conference workshop sessions.

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“Private business enterprises saw capital expenditure growth rates of 15.8% qqsaa [quarter-on-quarter seasonally adjusted annualised] in the second quarter of 2019, and 10.8% qqsaa in the third quarter. A positive out-turn is likely for private sector fixed investment growth in the last quarter of 2019 as well, with the SA Reserve Bank [Sarb] yet to release this data,” she says.

Watch: Private sector investment on the up

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The uptick in private sector expenditure, despite the country’s electricity woes and record low business confidence levels, comes as a surprise to some economists and business leaders. However Bishop believes the increased investment trend by the private sector, since the second quarter of last year, is set to continue this year and into 2021.

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Reiterating comments in her ‘Macro-economic Outlook 2020-2025’ report for Investec, which was published last week, she says that even with electricity supply challenges, not all areas of the economy performed poorly in 2019.

‘Substantial contribution’

“The private sector made a substantial contribution to capital expenditure in the middle two quarters.… This is likely to have continued in the last quarter and we expect this upward trend through 2020 and into next year, providing support to GDP as SA’s investment drive continues to gain traction,” Bishop notes.

“With the private sector accounting for around 70% of fixed investment in SA, what stands out from Sarb’s investment data is that the private sector is not on an investment strike. They may be the only ones really investing in the economy, while investment by government is declining.”

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“I am not trying to oversell this, but it does seem like private sector investment is gaining a bit of momentum,” she adds.

“It is not a boom and the private sector could invest more with better economic conditions, but the fact is that private business continues to invest in SA and this is keeping the economy going.”

Bishop says many people have a “misunderstanding” that private businesses are just sitting on a lot of savings. “Corporates build up savings. However they use some of this for capital investment in infrastructure to grow.… Corporates will always have savings, but it is a political myth that corporates are not investing.”

Government fixed investment contraction

She points out that Sarb data shows government capital expenditure on fixed investment was down 16.3% qqsaa in the second quarter of 2019 and 17.8% in the third quarter, after contracting by 2.1% in the first quarter. With mounting debt, and government moves to cut expenditure to avoid a Moody’s credit rating downgrade, Bishop believes 2020 could see a further contraction in government fixed investment.

Independent economist Mike Schüssler says the increase in private sector investment is a “positive”, especially considering the record low business confidence levels, poor economic growth, and the Eskom crisis.

“The private sector did, surprisingly, invest more – but the fact is that government is still investing less. This means that the private sector investment carries the country but is unlikely to continue if the government does not come to the party. While the uptick in private sector investment is welcome, I don’t think it is likely to continue to grow for whole of 2020,” he notes.

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Schüssler says the economy has seen increased private sector investment in transport and food production industries. He points to capital investments by the likes of Comair in buying new planes, as well as increased truck sales last year.

“The auto sector also continues to make major investments on the back of government’s tax incentives, while in agriculture investments are going into new crops such as macadamia nuts and pork exports,” he adds.

Bishop highlights the renewable energy and technology industries, which she says are seeing increased new private sector investment. She cites wind farms and solar projects as well as data centres and distribution centres linked to online businesses.