Neva Makgetla
3 September 2008
column
Johannesburg — IN THE past five years, SA has seen an extraordinary increase in dependence on foreign capital to fund investment.
For the decade from 1994, foreign capital inflows, less changes in reserves, paid for about a third of net fixed capital formation. In the three years to last year, in contrast, the share of foreign financing jumped to over 80%.
That growth might be welcome if it went to fund a long-term improvement in infrastructure or production. Indeed, the increase was associated with significant growth in investment, mostly for construction. But the rise in foreign investment also saw increased vulnerability to fluctuations in world markets, plus a steep drop in domestic savings.
The bulk of the new capital inflows have taken the form of investment in the stock market. As a share of total foreign investment, equity rose from just over 20% in 2000 to about 40% last year . While this type of investment is usually cheaper than foreign loans, it is gen-erally even more liquid. The rapid growth in foreign shareholdings largely reflected the belief that SA would benefit from booming world commodity prices. Not surprisingly, then, between 2003 and 2006 -- the latest data available from the Reserve Bank -- a quarter of equity investment went into mining stock, and two-fifths into the financial sector. These new inflows let SA live beyond its means. In particular, although investment climbed steadily relative to gross domestic product (GDP), the domestic savings rate stagnated. Between 2004 and last year , investment rose from 16% of GDP to over 20%. Although still on the low side by world standards, at least SA is back in the range for middle-income countries.
In contrast, in the same period gross savings remained almost unchanged, fluctuating around 14% of GDP. Particularly worrying was a steep drop in savings by households and companies after 2003.
In 2006 and last year, household savings actually turned negative, as families borrowed more than they earned. For most of the 1990s, household savings accounted for about a fifth of total investment; in contrast, from 2004 to last year, they contributed virtually nothing. In the same period, company savings dropped by over 75% in nominal terms, said the Bank. By last year, domestic corporate savings funded under a tenth of net fixed capital formation. In the past few years, only government savings have increased.
The decline at least in household savings seems directly linked to the increase in capital inflows. Foreign investment raised the value of the rand, dampening inflation and contributing to comparatively low and stable interest rates until a year ago. In response, households with access to bank credit vastly expanded their debt, resulting in a boom in housing construction and car sales. Domestic residences accounted for a disproportionate share of the rise in investment, climbing from 9% of the total to 12% between 2000 and last year, before dropping in recent months.
In the main, the recipients of credit were the already well off. According to the 2005 Income and Expenditure Survey, the richest 10% of households accounted for over three-quarters of the value of housing and car loans. In contrast, the poorest 60% of households owed well under a tenth of their earnings .
In short, the increase in foreign equity inflows demonstrates both the benefits of growth based on the world commodity boom and the risks. It has permitted rising investment and growth but has dampened domestic savings. That means that if foreign investors change their minds, SA has very little cushion to maintain investment and growth.
To manage these risks requires, above all, that investment be channelled more consistently into developmental projects that can sustain growth even if capital inflows reverse or commodity prices fall. The massive expansion in government investment can play a part. More targeted measures to constrain borrowing by well-off households would also help.
Makgetla is sector strategies co-ordinator in the Presidency.
Be the first to Write a Comment!
Copyright © 2008 Business Day. All rights reserved. Distributed by AllAfrica Global Media (allAfrica.com). To contact the copyright holder directly for corrections — or for permission to republish or make other authorized use of this material, click here.
AllAfrica aggregates and indexes content from over 125 African news organizations, plus more than 200 other sources, who are responsible for their own reporting and views. Articles and commentaries that identify allAfrica.com as the publisher are produced or commissioned by AllAfrica.
