South Africa investment outlook remains under pressure from structural risks
By Tarryn-Leigh Solomons
SOUTH Africa’s financial markets continue to perform well, but businesses remain cautious about committing capital to long-term investment projects.
That is the view of Efficient Group chief economist Dawie Roodt, who argues that the country’s biggest constraint to higher levels of fixed investment is not the interest-rate cycle, but structural and policy-related risks that continue to influence boardroom decisions.
Roodt believes it is important to distinguish between South Africa’s financial markets and investment in the productive economy.
“When you talk about financial instruments like the bond market and equities, that’s actually quite good. We have very well-managed and solid financial markets,” he told Cape Business News.
Fixed capital formation, however, presents a different picture.
“When you talk about fixed capital, like factories and so on, that’s certainly very bad.”
The comments come as South African companies continue to weigh capital allocation decisions against a backdrop of modest economic growth, infrastructure constraints and policy uncertainty. While the South African Reserve Bank recently left the repo rate unchanged at 7%, economists generally agree that monetary policy alone cannot drive a sustained recovery in private-sector investment.
Financial markets remain resilient
For Roodt, the reasons are structural rather than cyclical.
“The reason for that has to do with the wrong macroeconomic policies and things like crime and dysfunctional local authorities.”
For companies evaluating expansion projects, borrowing costs are only one part of the investment equation. Boards also assess policy certainty, regulatory stability, the reliability of municipal services, logistics infrastructure, energy security and the broader cost of doing business. Weaknesses across those areas increase project risk and can delay or redirect capital investment.
Although interest rates influence the cost of finance, Roodt does not regard them as the principal obstacle facing business.
“Interest rates are a very important factor, but relatively high interest rates are only temporary and are likely to come down.”
Structural risks outweigh interest rates
Instead, he identifies governance failures and policy uncertainty as the factors weighing most heavily on investor confidence.
“The negative factors have to do mostly with the wrong macroeconomic policies and, of course, incompetence and corruption and crime. We’ve also got policies like expropriation.”
“So, we’ve got a bad government, in short.”
Roodt had expected the Reserve Bank to increase interest rates and acknowledges that the cost of capital affects investment decisions. However, he argues that changes to monetary policy will have a limited impact if businesses remain uncertain about the country’s long-term operating environment.
“Interest rates certainly affect business. In the short term, people are concerned about interest rates, but I’m not too concerned about the interest rate cycle.”
Sector outlook remains uneven
The divergence between financial markets and fixed investment is also evident across sectors.
Roodt identifies financial services as one of the sectors continuing to attract investment, reflecting confidence in South Africa’s banking system and capital markets.
“The financial sector is a sector that people like to invest in because it’s part of the service industry.”
Mining, despite its strategic importance to the economy, tells a different story.
South Africa remains one of the world’s leading producers of several critical minerals, yet investment in new mining projects has been hampered by a combination of infrastructure bottlenecks, regulatory uncertainty and operational challenges.
“Mining is an obvious place where people would like to invest, but they can’t because of all sorts of obstacles there.”
Political certainty key to investment
For Roodt, the dominant investment risk remains political.
“The major risk has to do with politics. It’s about government that is incompetent and destructive.”
