Two Perspectives on Falling Foreign Direct Investment in South Africa

This is a guest post by John Causey, an independent private equity consultant based in Cape Town, South Africa.  He specializes in sub-Saharan Africa transactions, with investors mainly from the EU and US.

South Africa’s foreign direct investment (FDI) inflows have dropped by 43.6  percent in the first half of 2012. The decline is the largest among all developing countries.

Collectively, developing economies experienced a decline of 4.8 percent. Globally, FDI was down 8 percent, and in Africa, flows were up 5.1 percent, over the same period. China remained–outside of the United States–the most attractive magnet for foreign investment in the first half of 2012.

Why is investment capital avoiding South Africa?

The UN’s Global Investment Trends Monitor report suggests a simple answer; the significant fall in FDI inflows in the first half of 2012 is due to slower economic growth in South Africa. The reasons for the stifled economic activity and deteriorating investor sentiments are being widely debated in South Africa.

First; the bad news.

In spite of having all the advantages–a developed stock exchange, substantial mineral wealth, strong liberal constitution, and effective parliament–the country, nevertheless, lags behind many of its peers in Africa, both economically and politically. Morgan Stanley, a prominent global Investment Bank, predicts that Nigeria will overtake South Africa by 2025, becoming the Continent’s economic superpower.

The Economist has also weighed in. Through an article, widely read in South Africa, they drew a line in the sand, plainly describing the bleak view many investors now hold of the rainbow nation. The picture painted was of gathering gloom fed by the recent rating agency downgrade of South African sovereign debt, mining strikes–including the Marikana strike which led to the death of thirty-four miners–the state’s inability to provide basic services, poor education, growing gap between rich and poor, and persistent one-party domination. Intensifying the gloom are the carnivals surrounding the saga of Julius Malema, and the now infamous, revealing painting of President Jacob Zuma.

The news is not all bad!

As a response to the barrage of negativity and anxiety surrounding the investment climate in South Africa, the founder and former CEO of FirstRand, Paul Harris, opined that South Africa has much to offer. He brushed aside criticisms, partially blamed the naysaying diaspora for the negative investor perceptions, and cited recent successes in rugby and at the Olympics as reasons for optimism.

South Africa’s surprise admission into the BRIC consortium of nations in 2010 increased its clout on the world stage. It could pay dividends in the future as the ANC-led government continues its eastward drift. Inclusion into Citigroup’s World Government Bond Index (WGBI) should increase flows into sovereign debt, and also further substantiates South Africa’s strong position in the emerging debt markets.

Based on the numbers, it seems the international investment community has selected the negative perspective, and is voting with its pocketbook. Which way do you spin the numbers?