The return of Old Mutual Limited represents a symbolic moment for the Ramaphosa administration, not only because of the historic significance, with the original insurer founded in South Africa in 1845, but also because it implies a vote of confidence in the economy at a time when questions are intensifying over whether South Africa will be able to garner adequate levels of foreign direct investment (FDI) going forward.
Inflows into the country have tailed off alarmingly in recent years, but the African National Congress (ANC) government received a timely boost towards the end of last month, when China’s premier Xi Jinping promised $14.7bn in investments during a state visit to South Africa, a sizeable chuck of which is earmarked for the country’s perennially troubled power utility, Eskom – good news for the mining lobby. That’s on top of other pledges secured in July amounting to $20bn from Saudi Arabia and the United Arab Emirates (UAE).
In aggregate, the pledges amount to just over a third of the $100bn in FDI targeted by the country’s president, Cyril Ramaphosa, to help reignite economic growth. Despite faltering economic performance under the previous Zuma administration, FDI accounted for a relatively small proportion of the nation’s gross domestic product (GDP), yet South Africa remains one of the world’s most prominent economies based solely on FDI stock.
The reality is that given its high ratio of debt to GDP and deteriorating current account position, South Africa needs foreign inflows as much as it ever did. The trouble is that fomenting political issues are grinding up against the economic imperative. Chief among them, an explicit commitment by the ANC to change the constitution to allow expropriation of land without compensation.
The issue obviously has fundamental implications for property rights in the country, but more than two decades after the end of apartheid, the ANC is under pressure to push ahead with reforms to transfer land to the black majority before next year's national election when it will face the rival socialist Economic Freedom Fighters party, which tabled the initial proposal to amend section 25 of the South African Constitution.
Regardless of any moral considerations, the policy, if implemented, will be viewed as a major disincentive for investors even if South Africa avoids the worst excesses of the policy when it was enacted in neighbouring Zimbabwe. Sentiment has already worsened because South Africa has unilaterally withdrawn from some treaties which were originally established to afford foreign investors a certain level of protection. Investors will also be taking a keen interest in some of the more contentious proposals laid out in the 2018 draft mining charter. Anglo American (AAL) chief executive Mark Cutifani recently said the mining heavyweight has no intention of selling South African assets, but it would be interesting to hear his views on the practicality of the proposal to compel miners to ensure that 80 per cent of services supplied to mines must be from South African companies (of which 60 per cent must be Black Economic Empowerment entrepreneurs).
