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Rejuvenating South Africa's economy - What do foreign investors think?

Copyright © 2021

Inclusive Society Institute

50 Long Street

Cape Town

South Africa


235-515 NPO

All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means without permission in writing from the Inclusive Society Institute


Views expressed in this report do not necessarily represent the views of

the Inclusive Society Institute or those of their respective Board or Council

members. All records and findings included in this report, originate from

a panel discussion on developing a new economic blueprint for South Africa,

which took place in August 2021

With appreciation to the South African German Chamber of Commerce and Industry,

with whom this dialogue was jointly hosted.

Author: Mariaan Webb, Creamer Media

Edited: Daryl Swanepoel


Abbreviations & acronyms


Identifying weaknesses

  • Broad-based black economic empowerment

  • Corruption and declining State capacity

  • Crime and security concerns

  • Exchange rate volatility

  • Market concentration

  • Quality of infrastructure

  • Skills and education

  • Strategic planning

Interventions for fostering growth


Reference list

Abbreviations & acronyms

BBBEE broad-based black economic empowerment

BLSA Business Leadership South Africa

CPI Corruption Perception Index

FDI foreign direct investment

GCI Global Competitiveness Index

GDP gross domestic product

IMF International Monetary Fund

ISI Inclusive Society Institute

SARB South African Reserve Bank

SoE State-owned enterprise

Stats SA Statistics South Africa

Unctad United Nations Conference on Trade and Development

YES Youth Employment Service

WEF World Economic Forum


Foreign direct investment (FDI) is sought after by emerging economies such as South Africa. FDI is an integral part of the international economic system and acts as a major catalyst for development, with resources often channelled to infrastructure and manufacturing investments.

Over the years, South Africa has developed its reputation as a ‘gateway’ for international companies looking at the African continent as an investment destination, but in recent years its ‘gateway to Africa’ status has come under threat, as a result of electricity and logistical weaknesses within the South African economy and a preference for direct bilateral relations between investors and a number of African countries.

The United Nations Conference on Trade and Development (Unctad) ‘World Investment Report’ shows that FDI inflow into South Africa was $9-billion in 2008, before the global financial crisis (Unctad, 2010). This has decreased in subsequent years, with FDI inflow falling to $5.13-billion in 2019 and to $3.11-billion in 2020 (Unctad, 2021). The sharp year-on-year decrease in 2020 is attributed to the impact of the Covid-19 pandemic, with South Africa, as with most other countries, having borne high human and economic costs owing to the health crisis. However, the country entered the pandemic in an already precarious position, with high public-sector debt, particularly among State-owned enterprises (SoEs), electricity shortages and a frustratingly low economic growth rate.

Much like the rest of the world, South Africa has been through challenging times as a result of the impact of the Covid-19 pandemic. Gross domestic product (GDP) contracted by 7% in 2020 (Stats SA, 2021a). Economic activity rebounded in the first two quarters of 2021, with first-quarter GDP growth of 1% (4.20% annualised) and second-quarter GDP growth of 1.20% (4.70% annualised). Despite the gains, the economy is still 1.40% smaller than what it was before the Covid-19 pandemic (Stats SA 2021b). Helped by a commodities boom, the International Monetary Fund (IMF) is forecasting that South Africa’s economy will expand by 5% in 2021 and 2.20% in 2022 (IMF, 2021).

Foreign investment could play an important role in supporting South Africa’s economic recovery following the pandemic. Although the South African government, in principle, encourages FDI, investors and market analysts are concerned that, in practice, its commitment to assist foreign investors is insufficient.

The Inclusive Society Institute (ISI) has met with foreign investors to canvass their views on the barriers to investment in South Africa and to gain an understanding of what new initiatives or changes are needed to shift the economy into a higher growth trajectory.

This report is a summary of themes from discussions between the ISI and the FDI community, held in collaboration with the Southern African-German Chamber of Commerce in August 2021.

It highlights that South Africa still has many strengths that make it a preferable market. The country continues to be anchored by the institutional strength of the National Treasury and the South African Reserve Bank (SARB), and its infrastructure, although deteriorating, is relatively superior to that of its African neighbours. The discussions, however, have also highlighted limitations regarding crime and security, corruption, skills, electricity supply problems, ethics and governance concerns, as well as diminished State capacity.

The dialogue of FDI forms part of the ISI’s comprehensive research to develop a new growth-centred economic blueprint for South Africa. The intended blueprint aims to reignite economic activity, restore investor confidence, and create sustainable jobs for the millions of unemployed who call South Africa home.

In the first phase of the research, the ISI studied economies – such as, Japan, South Korea and Germany – which at different points in history recovered from distress and turned themselves around, often within a short space of time. In the second phase, the ISI is studying South Africa’s current economic policies to better understand what the country is doing right, what should be changed and what new policies should be pursued.

Identifying weaknesses

Broad-based black economic empowerment

The broad-based black economic-empowerment (BBBEE) policy, which aims to increase the participation of black people in the management, ownership and control of South Africa’s economy, is viewed by many as a barrier to entry and a disincentive to foreign investment. The Act and associated codes of good practice require levels of company ownership and participation by black South Africans, if inter alia a company is to get bidding preferences on government tenders and contracts.

It is acknowledged that multinationals have global practices, which make it difficult for them to comply with the ownership element of BBBEE through the sale of shares to black South Africans. In this instance, the Department of Trade, Industry and Competition has created an alternative equity equivalence programme for multinational or foreign-owned companies to allow for them to score on the ownership requirements. Many, however, view the terms as onerous and restrictive. Changing of goalposts is also a concern – as it results in uncertainty among investors and potential investors. It is argued that if black economic-empowerment requirements are removed or made easier and more certain, then it is likely that poorer South Africans could benefit more by ensuring that the country achieves higher economic growth and job creation by attracting more FDI.

Corruption and declining State capacity

South Africa continues to grapple with corruption, eroding public trust and weakening of the State’s capability to deliver services. Transparency International’s Corruption Perception Index (CPI), which ranks countries and territories by their perceived levels of public-sector corruption, scores South Africa at 44 points on a scale where zero is ‘highly corrupt’ and 100 is ‘very clean’. This compares with Botswana’s CPI score of 60. In terms of the 180 countries analysed, South Africa is ranked sixty-nineth, Botswana (35), Namibia (57), Lesotho (83), Zambia (117), Mozambique (149) and Zimbabwe (157) (Transparency International, 2021).

The most common types of corruption include maladministration, procurement corruption and abuse of authority (Corruption Watch, 2021). State capture – a type of systematic political corruption in which private interests influence the State’s decision-making – became synonymous with Jacob Zuma’s Presidency. President Cyril Ramaphosa has denounced corruption since assuming office in February 2018 and has vowed to tackle the scourge at all levels of government. South Africans, however, believe corruption has continued during the tenure of Ramaphosa, despite his Presidency’s anticorruption efforts. Large portions of elected officials and civil servants are perceived to be involved in corrupt activities and the police are widely perceived as corrupt (Patel & Govindasamy, 2021).

Systematic corruption, poor skills at critical levels and not holding officials accountable have undermined State capacity. The World Bank’s World Development Indicators show that the South African State’s capacity has declined. It has gone backwards on indicators measuring control of corruption, rule of law, regulatory quality and government effectiveness, among others (World Bank, 2021).

Critics of the ANC’s cadre deployment policy argue that the practice, which Ramaphosa continued to defend recently at the Judicial Commission of Inquiry into Allegations of State Capture as a means of quickening transformation, has laid the foundations for corruption and inefficiencies in government and SoEs.

Corruption, fraud and bribery influence perceptions of a country and it could deter investors from investing in South Africa. The declining capacity and performance of the State were mentioned by many participants in the ISI dialogue.

Crime and security concerns

South Africa has a long history of crime and violence, including State-sponsored violence during the Apartheid era. The high levels of crime experienced in South Africa worry citizens and foreign investors alike. Business Leadership South Africa (BLSA) has warned that foreign investment will be difficult to attract if South Africa’s crime levels, particularly violent crime levels, remain high. High levels of crime may also encourage people with scarce skills to emigrate, negatively affecting the efficiency of the workforce (BLSA, 2021).

While South Africa still enjoys strong, democratic political institutions and the overall political environment is stable, the July 2021 unrest in KwaZulu-Natal and parts of Gauteng have cast a pall over the investment climate. The unrest and looting, which was triggered by the jailing of Zuma for contempt of court, may portray the country as an undesirable destination for foreign capital. The events that unfolded in July 2021 were severely damaging to South Africa’s image abroad. The images of unrest, violence and looting, which required the intervention of the South African Defence Force, caused distress among domestic and foreign investors, as well as the international community, with the potential to do long-term harm to the perception of South Africa as a stable investment destination.

High-profile crime cases, such as the murder of a senior manager of mining major Rio Tinto in May 2021, also damage investors’ perceptions. It was reported that the mining company may hold back on a R6.50-billion investment in Richards Bay, KwaZulu-Natal, owing to violence and unrest near its operations (TimesLive, 2021).

Exchange rate volatility

Exchange rate volatility is seen as a key deterrent to FDI. The rand is a relatively volatile currency, reflecting the extent of domestic and external shocks combined with the SARB’s floating exchange rate policy. Higher volatility generally increases uncertainty and the risk premium, discouraging firms from investing. Higher currency volatility and depreciation also have negative effects in the presence of currency mismatches in investors’ balance sheets, reducing resources available for investment (IMF, 2020).

By reducing the rand’s volatility to that of developing country peers, South Africa could boost FDI inflows by a potential 0.25 percentage points of GDP (Hanusch, Nguyen & Algu, 2018).

Market concentration

A concerning structural feature of the South African economy is the high level of market concentration and low levels of competition. Market concentration can be beneficial in terms of economies of scale and keeping down inflation in certain sectors. The large players, mostly in banking and retail, also managed to weather the Covid-19 epidemic and the recent social unrest better than smaller participants. However, a lack of competition holds back innovation, keeps prices high and denies many people access to services and opportunities to start businesses. Competition is good for an economy and South Africa does not have enough of it.

Quality of infrastructure

The quantity and quality of infrastructure have an impact on economic growth and investment inflows. The World Economic Forum’s (WEF’s) 2019 Global Competitiveness Index (GCI) views South Africa’s transport infrastructure as one of its established strengths. The GCI ranks South Africa sixty-nineth out of 141 countries for infrastructure (WEF, 2019). However, while the quality of road and air transport infrastructure ranked well, rail and power capacity shortages are a severe constraint on trade. The performance of South Africa’s ports, for instance, has substantially declined and the country’s container ports are rated among the world’s worst performers (Maleke, 2021). Electricity and water supply issues also weaken the country’s overall infrastructure performance.

South Africa’s electricity supply constraints are well documented. A continuing decline in the performance of State-owned power utility Eskom’s coal fleet has been driving intensive periods of load-shedding. In the first six months of 2021, rotational power cuts were implemented for 650 hours, or 15% of the time (Calitz & Wright, 2021). Government has announced plans for 11 813 MW of new power capacity from various sources, has eased licensing regulations for self-generation for projects of up to 100 MW and is unbundling Eskom into three separate entities to address its significant debt levels.

Skills and education

Despite a population of nearly 60-million, South Africa continues to experience a shortage of human capital, meaning companies find it difficult to fill key positions to conduct their business. The skills most in demand, but hardest to source locally, are: engineering; information, communication and technology specialists; foreign language speakers; media and marketing specialists; artisans; C-suite executives; senior financial executives; healthcare specialists; science professionals and accounting professionals. According to XpatWeb’s ‘2021 Critical Skills Survey’, 77% of organisations report that they struggle to source critical skills in South Africa for local and cross-border operations (XpatWeb, 2021).

Although unemployment is high, employers argue that they cannot risk the integrity of their operations by hiring inexperienced employees (XpatWeb, 2021). Companies say that a lack of required skills is a major obstacle to growing their investments in South Africa.

Getting the basics of schooling and tertiary education right could assist in narrowing the skills gap. Currently, South Africa’s education system – in which expenditure on primary, secondary, and post-secondary nontertiary education is relatively high when compared with Organisation for Economic Cooperation and Development countries (Education GPS, 2021) – is not delivering the desired outcomes. South African learners, for example, are among the world’s worst performers in mathematics and science (Reddy et al, 2020). Young people who exit the schooling system are not appropriately skilled for employment. The same can be said for tertiary education, with a gap between what higher education institutions produce in their graduates and what employers require (Bernstein & Osman, 2012).

South Africa’s businesses also struggle to fill the void left by emigration, with a steady exodus of professionals leaving for other countries. It is essential South Africa attract and secure critically skilled workers. However, skilled foreign workers find the work permit and visa application process cumbersome (Matthes & Bisseker, 2021.) South Africa needs to ensure that it creates, attracts and retains the skills that are needed to reindustrialise the economy.

Strategic planning

South Africa has a multitude of development plans and policies, but these policies fail to be properly implemented and often lack coordination. Government often has many conflicting interests and tries to be all things to all people, leaving its economic planning without a clear focus. Government should be more selective about what investments it wants to attract and must be more realistic about the sectors that it targets for investment. Its focus should be where the country has a competitive advantage.

South Africa’s governance style also lacks coordination, with various offices and agencies operating in silos. A recent example of this uncoordinated approach is the Social Development Department’s Green Paper on Comprehensive Social Security and Retirement Reform. The paper triggered outrage among taxpayers and the business sector, as it proposed that all South African earners pay up to 12% of their income into a new government-managed investment fund. The Green Paper was gazetted without approval from Cabinet and ultimately National Treasury settled the matter clarifying that it was not official government policy. The Green Paper was withdrawn (Fin24, 2021).

South Africa could learn from the experiences of Singapore, a small nation State with about 5.70-million people and no natural resources. Singapore has experienced an impressive economic transformation over the past 50 years, producing rapid economic growth and delivering extraordinary improvements in social welfare. Singapore’s economic model is characterised by superior organisation ability, pragmatism and deep-seated values, such as meritocracy, multiracialism, and dedication to ordinary people. These principles have provided the foundation for a set of interlinked polices that have served Singapore since its independence (Bhaskaran, 2018). Singapore conducts deep-rooted strategic planning with a long-term perspective, and executes it impressively. Investors are also held accountable and must prove that the subsidies received have been spent.

Interventions for fostering growth

Suggestions to enhance investor confidence

Build on strengths and focus on competitive advantages

South Africa should build on its strengths, in addition to trying to overcome its weaknesses. Money flows where there is a competitive advantage. Instead of entering industries in which South Africa may not be competitive, the country should focus on industries where it has a competitive advantage such as agriculture, mining and the automotive industry. For instance, efforts should be directed to ensure that the automotive industry and supply base are even more internationally competitive. The country is already competitive in agriculture and should focus on related industries such as food processing. By ensuring the quality, and improved marketing and branding, of locally produced food products, we could compete globally.

Create a geopolitical alternative

The world is in for a bumpy ride, from a political and economic perspective, in the next couple of years. South Africa should establish itself as a geopolitical alternative if manufacturing, supply chains or trade routes are disrupted in other jurisdictions. Disruptions caused by the global Covid-19 pandemic highlighted the role that South Africa could play as a geopolitical alternative for global companies.

Incentivise youth employment and training

The Broad-Based Black Economic Empowerment scorecard could be reconfigured to incentivise businesses to invest more in youth employment and training. It is suggested that the Youth Employment Service (YES), started by President Cyril Ramaphosa, be extended to allow for three years of employment. Currently, businesses that participate in the YES programme create one-year positions for youth aged between 18 and 35. Many young people who completed only a one-year internship still end up without a job. It is suggested that this be extended to three years, offering those who received the internship a better chance of finding permanent employment. SUGGESTIONS TO ENHANCE INVESTOR CONFIDENCE – CONTINUED Pursue sustainable energy investments

South Africa is in a prime position to pursue sustainable energy investments and invest locally in ‘green’ hydrogen in a big way, with key resources readily available. These investments would come at a time when there is a global shift to advancing an environmental, social and governance mindset. Should South Africa manage to deliver cheap and sustainable energy, it could attract industries that are no longer viable in the West, owing to space constraints or the higher cost of electricity.

Sustainable energy investments will also assist South Africa to deal with its electricity supply issues. This is also of particular importance, considering the automotive industry’s impending shift to electric vehicles. A suggestion for sustainable energy investment is that companies with big warehouses, for instance, be incentivised to install solar panels on their roofs for own use and to feed excess electricity back into the grid.

Selective priorities for implementation success

South Africa must curtail its ambitions, focus on a smaller number of deliverables, and ensure that they are implemented effectively. Succeeding in three to five policy areas, rather than spreading the efforts across a broad spectrum of areas without the means or capacity to implement them, will yield more positive results. Priorities that would bolster the economy most are education, infrastructure and digital connectivity. Strengthening the capacity of the State is needed to ensure the successful implementation of polices and plans. Technical skills at national, provincial and local levels must be reinforced to deliver on plans.

Speed up privatisation

Fast-tracking the privatisation of certain State-owned enterprises (SoE) will improve the efficiency of service delivery, freeing up funding that government can use to focus elsewhere. Government has announced the sale of 51% of South African Airways to a private consortium, marking a shift from the State’s stance on SoE control and ownership. SUGGESTIONS TO ENHANCE INVESTOR CONFIDENCE – CONTINUED Support foreign investors and rebuild trust

Government should be prepared to support manufacturers of large machinery and equipment if it is to attract investment. Currently, South Africa lacks the volumes required for multinationals to view the country as an attractive investment destination. Investors must feel there is a ‘reward’ justifying the ‘risk’ that they take investing in a country. There is also little trust between government and business, specifically long-term investors. A concerted effort is needed to build trust between government, authorities, and businesses. Unless trust is restored, business may view South Africa as being ‘too risky’.

Rebuild the education system

South Africa cannot solve its unemployment problem without also solving its education problem. More emphasis should be placed on the first 12 to 15 years of life, ensuring that young people are properly educated, with a stronger focus on effectively teaching science, technology, engineering, and mathematics. This will benefit not only the labour force, but also make people more employable, chipping away at the country’s high unemployment rate. However, government cannot solve the education issues on its own and more private-sector involvement is encouraged, although private-sector participation should not compromise access to education, which the State makes available on a fee-free basis. The private sector could also collaborate, pooling together funds to address pressing needs at schools in their region.

Use transformation funding more effectively

The automotive industry’s collaboration on transformation funding is an example for other industries to emulate. The Automotive Industry Transformation Fund was established as a collective equity-equivalent investment programme, as defined in the Broad-Based Black Economic Empowerment Codes. It aims to facilitate transformation in the automotive sector’s value chain through the provision of access to developmental funding, access to market and access to capacity development for qualifying black-owned entities. Pooling resources together could amplify the impact. The same could be done with corporate social investment funding, where several large corporates pool their funds together for a bigger impact than smaller initiatives.

Weed out corruption

Law enforcement capacity must be strengthened to deal decisively with corruption in the private and public sectors. Holding government more accountable will assist in fighting the scourge of corruption.


Despite slow economic growth in recent years, South Africa remains a good investment destination with some highly desirable fundamentals, and significant growth and profit-making potential. This is the key message that should be communicated to the global investment community.

To continue to attract FDI, government must acknowledge that improved investor confidence will be the cheapest and most effective stimulus for the economy. A commitment to policy certainty is needed, as policy instability does not instil confidence and create increased perceived risk for international capital. Serious foreign investors take a long-term view, and any uncertainties make their calculation of the reward required for an investment that much higher.

In addition to credible communication about long-term stability and policy certainty, there is a need to address crime, corruption, education failures and a lack of service delivery to generate the kind of improved sentiment about the country, which will stimulate foreign investment and create more growth and employment opportunities.


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This report has been published by the Inclusive Society Institute

The Inclusive Society Institute (ISI) is an autonomous and independent institution that functions independently from any other entity. It is founded for the purpose of supporting and further deepening multi-party democracy. The ISI’s work is motivated by its desire to achieve non-racialism, non-sexism, social justice and cohesion, economic development and equality in South Africa, through a value system that embodies the social and national democratic principles associated with a developmental state. It recognises that a well-functioning democracy requires well-functioning political formations that are suitably equipped and capacitated. It further acknowledges that South Africa is inextricably linked to the ever transforming and interdependent global world, which necessitates international and multilateral cooperation. As such, the ISI also seeks to achieve its ideals at a global level through cooperation with like-minded parties and organs of civil society who share its basic values. In South Africa, ISI’s ideological positioning is aligned with that of the current ruling party and others in broader society with similar ideals.

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