Investment in SA takes dramatic dive

The latest analysis of the country’s capital projects by Nedbank shows that capital investment in SA is on the decline.

Adding up all the capital investment in fixed infrastructure — as announced by the private and public sector for the foreseeable future – shows that it has decreased by a massive 30 percent compared to a year ago.

A note to the Nedbank Capital Expenditure Project Listing report for the first half of 2023 tells the whole story: “Fixed investment is spending on physical assets such buildings, infrastructure, plant, machinery and equipment, which adds to production capacity.”

The economy cannot grow without fixed investment. The Nedbank survey aims to list all the capital projects announced by either the private or public sector, with the latest list showing a sharp fall in fixed investment activity in the first six months of the year.

“The value of new projects announced amounted to an annualised R173,1 billion, down from R248,5 billion and R392,7 billion recorded in 2022 and 2021, respectively,” according to the report.

“The slowdown resulted from a moderation in new projects announced by the private sector and zero announcements from public corporations,” it says.

“Projects announced by the private sector fell to R69,8 billion from R193,6 billion, accounting for only 40 percent of the total.”

This somewhat conflicting statement is explained in that Nedbank says it could not pick up any new projects by public corporations in the first half of the year, but that nearly R237 billion worth of projects are underway, most of which were announced in 2021.

These projects involve large undertakings by Eskom, the Passenger Rail Agency of SA (Prasa) and the SA National Roads Agency (Sanral).

Nedbank’s listing shows a dramatic decline in fixed investment activity in the first half of 2023 as persistent power outages, rising interest rates and cost pressures weigh on profitability and erode business confidence.

“The value of new projects announced during the first half of the year fell to an annualised R173,1 billion from R248,5 billion in 2022,” according to the analysis. (General) government replaced the private sector as the major driver, with planned new projects rising to R103,4 billion, accounting for 60 percent of the total value of new projects announced in the first half of 2023.

“In sharp contrast, no new projects were announced by public corporations following a flurry of announcements in previous years.”

The bank says capital projects by the private sector dropped to an annualised R697,8 billion, amounting to around 40 percent of the total value of new projects announced.

Scope of the analysis

The Nedbank listing is a record of major capital projects undertaken within SA’s borders.

The bank states that the listing only includes projects that have been announced to the public, with the information gathered from a variety of sources.

The listing tries to isolate and record expansionary projects, but also includes the automation or modernisation of existing capacity.

These projects are included because they result in the production of more goods and services by improving the productivity of existing operations.

Only projects of R20 million and above are included. The details of all projects over R250 million are verified directly with the company or institution undertaking the investment.

However, Nedbank states that its listing does not always reflect changes to the scale, value, or starting and ending dates of the projects below this cut-off value.

“Nedbank’s project listing is not an approximation of the official fixed investment figures, which records actual fixed investment spending in a quarter. The listing records project announcements.

“There is always a lag between when a project is announced and when the spending starts,” according to the bank.

“The schedule is a rough guide of the trajectory of fixed investment in the years ahead. It is also a useful guide to identify and track activity in the various industries.”

Investment flow

It is noticeable that large investments are flowing towards renewable energy projects.

“Most projects involve a shift to renewable energy sources with projects valued at R10,9 billion, indicating the greater need for self-generating capacity by businesses in the wake of the country’s energy crisis,” according to Nedbank.

Round 5 of the Renewable Energy Independent Power Producer Procurement (Reippp) programme in May 2022 promised investment of R34,3 billion, and Round 6 promised another R12,1 billion a few weeks later. The Soetwater wind farm announced investment of another R3,5 billion in July 2022.

This year has seen Scatec announce the development of the R5.1 billion Grootfontein Solar Project, while ArcelorMittal is set to invest R4 billion in a renewable energy project of its own. Other projects include a solar plant in Paardevlei (capable of providing a full stage of load shedding protection during the day) and the Steenbras hydro pump storage scheme, which aims to save up to two stages where possible.

Commenting on the “dramatic decline in fixed investment activity” as per Nedbank’s capital expenditure listing, Professor Raymond Parsons of the Business School at North West University says it is a sign that persistent power outages, rising interest rates and cost pressures are weighing on profitability and eroding business confidence.

“The Nedbank Capital Expenditure Project Listing for the first half of 2023 flashes a strong red light about future investment and growth trends in the economy. It is generally recognised that if South Africa is to reach growth rates that exceed 3 percent per annum and reduce unemployment, total fixed investment needs to be about 25 percent of gross domestic product (GDP).

“At present, this ratio hovers only at about 14 percent of GDP, which is inadequate to meet South Africa’s socio-economic needs. The Nedbank survey is, therefore, not good news on this front,” he says.

“It is particularly private fixed investment that has taken the biggest knock.

“It is widely accepted that the private sector is the biggest single creator of jobs in the economy.

“The survey indicates that public sector investment has, fortunately, been positive, but the modest overall recovery in gross fixed capital formation is battling to maintain momentum. — Moneyweb.

“It is mainly the levels of policy uncertainty and weak confidence that have persuaded firms to delay or postpone key investment plans,” says Parsons.

He warns that the message from the Nedbank analysis is that the sharp drop in new investment plans suggests that the downside risks to the growth outlook in 2024 and beyond may be greater than previously anticipated.

“The overarching remedy is to ensure both that the energy challenge is more adequately addressed and that the implementation of essential structural reforms is expedited.”

Outlook?

Nedbank expects the slowdown in capital spending to continue during the remainder of 2023 and into 2024.

“Gross fixed capital formation is forecast to grow by about 3 percent, down from 4,7 percent in 2022,” it says.

“The only boost will come from investment in renewable energy generation and public sector infrastructure spending. The sharp drop in new investment plans point(s) to a deeper slowdown in 2024 and possibly beyond.

“The electricity shortage and its impact on domestic economic activity, combined with the evolving downturn in global demand, will keep business confidence subdued.” — Moneyweb.