- SA private companies’ investment in the local economy grew for the first time since 2017, particularly in machinery.
- One economist believes it's due to IPP projects starting construction.
- He said investment has to grow for a couple of quarters to see it as a positive sign for the economy.
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For the first time since 2017, South African private companies have invested more back into the local economy.
Statistics South Africa’s Gross Domestic Product (GDP) results, released last week, showed that gross fixed capital formation (GFCF) increased by 6,1% in the second quarter of 2019, following five consecutive quarters of decline.
GFCF reflects local companies’ investment in fixed assets in South Africa.
Investment in machinery and other equipment grew by 5.8% - the largest increase, transport equipment grew by 2.1%, and residential assets with 0.9%.
Meanwhile, investment in construction works declined by 1.1%, non-residential assets by 1% and other assets by 0.6%.
Hugo Pienaar, chief economist at the Bureau for Economic Research at Stellenbosch University, believes the growth investment is predominantly due to a number of Independent Power Producer (IPP) projects which have started construction.
Former energy minister Jeff Radebe signed R56 billion worth of IPP contracts with 27 independent renewable energy power producers in April 2018 to add electricty to the national grid.
Pienaar said because the investment growth is predominantly in machinery, he believes it reflects IPP projects who have shown signs of starting construction in the second quarter.
“It is too early to celebrate this as signs of an improving economy, particularly not after yesterday’s horrible business confidence numbers,” Pienaar told Business Insider South Africa.
The South African Chamber of Commerce and Industry on Wednesday said South African business confidence dropped to its lowest levels since 1985.
“Private companies typically do not invest if there is low business confidence. What we’ll have to see is a couple of quarters of investment growth to see it as a sign that the economy improving.”
Pienaar believes the boost in machinery investment will be carried over to the next quarter as IPP projects continue with construction.
Petri Redelinghuys, a trader and the founder of Herenya Capital Advisors, said the high likelihood that South Africa will retain its investment grading from rating agency Moody might have bolstered investment.
He, however, agrees with Pienaar that a few months of increased investment is required to see it as a positive sign in the economy.
“I think only then can we comfortably say that it is a sign that the ship is turning around. Until then, it could just be an outlier,” Redelinghuys said.
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