After the war the West is likely to concentrate on funding Ukraine and rebuilding it
When the sixth SA administration came into office in 2019 economic growth was stagnant at 0.1% and had averaged just 1.4% a year over the previous decade. Growth in the primary sector averaged 0.6% a year and 0.1% in the secondary sector. The services sector remained resilient at an average of 1.8%.
Economist Ricardo Hausmann and his co-authors attribute this stagnation to three factors: an external story, which includes the end of the commodity price boom; a macro story involving unsuccessful fiscal consolidation efforts after the global financial crisis and tightening monetary policy; and a microeconomic story involving tightening product and labour market regulations, mismanagement of state-owned companies (SOCs), the introduction of the new mining charter, and debates about expropriation of land without compensation.
There was little chance to change the economic prospects of the country without changing the narrative about private investment as a necessary requirement, which in turn required a change in narrative on economic policy. It is clear the policy trajectory has changed, though the speed of implementation remains slower than desired. SOC reform is taking place, and expropriation of land without compensation and pressure to nationalise the SA Reserve Bank are no longer making headlines.
When Covid-19 hit countries looked inward and put more focus on fighting the pandemic. Investment was not a priority. The Russia-Ukraine war will reinforce that trend as potential source countries for foreign direct investment (FDI), largely Europe and the US, will reprioritise spending to fight Russia while the war continues, and to rebuild Ukraine when the war ends. It is human nature to want to take care of home problems before playing good Samaritan elsewhere.
We looked at the response of FDI inflows to nine wars (or geopolitics shocks) and the Brexit vote, to get a sense of what we should expect and what policymakers should do in response. The results appear convincing — world FDI inflows contract on average 2% in the year of the war and recover thereafter, but to lower growth rates than the year before the war.
At a regional level there are variations. FDI inflows into developed markets contract during the year of the war by an average of 4.5% and recover to pre-war growth rates the year after. Emerging markets show a somewhat different trend, with FDI inflows remaining resilient in the year of the war and contracting by an average of nearly 1% the year after, followed by big growth in year two.
Africa in general has a somewhat different dynamic to the US, Europe and Asia, with FDI inflows contracting by an average of 10% in the year before the war and returning to positive territory thereafter. In the case of SA, FDI inflows contract the year before the war and recover in the year of the war before contracting a year after the war.
The Covid-19 pandemic, and now the Russia-Ukraine war, are therefore bad news for SA as much as they are for the rest of the world. SA has been on an investment drive since 2018, but economic growth is now moderating into a global environment of rising interest rates and the withdrawal of fiscal stimulus.
The lessons from the previous nine wars and the Brexit vote show us that it is going to be even harder for SA to attract FDI this year and things are unlikely to improve until after the war in Ukraine. The West is likely to divert funds and concentrate on funding Ukraine and rebuilding it after the war. The implication is that funds that have been pledged but not committed to SA, including those for financing the transition to net zero carbon emissions, is likely to be delayed.
So policymakers need to be more determined in implementing economic reforms and marketing SA through the investment conferences, to ensure the country remains top-of-mind for international investors.