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In today's blog we will take a look at a relatively complex topic called Gross Fixed Capital Formation (GFCF). This is an indicator of "net" investments in fixed assets by government, public enterprises and private businesses. And this is usually an indicator of investor sentiment in a country. If they forsee strong future growth there will be strong growth in GFCF as businesses for example buy fixed assets in order to cope with future increases in demand. Low GFCF numbers can indicate sluggish economic conditions and a lack of investors confidence in the future prospects of a country.
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What is SA's total GFCF like?
We will start of by looking at the total growth in South Africa's GFCF from 2010, and will then start unpacking this figure by looking at the total growth reported by government, public corporations and private businesses. From there we will take a specific types of fixed assets these type of entities invest in, or have stopped investing in. The bar chart below shows SA's annual growth in Total GFCF from 2010. (Thus annual growth only starts in 2011).
From the bar chart it is clear that the growth in GFCF has been slowing and in 2016 actually showed a decrease compared to the year before it. It is concerning that there has been a decline in the value of GFCF in South Africa. As an economy needs strong GFCF to insure infrastructure and machinery and equipment and other fixed assets are available to support and facilitate economic growth. So the question then becomes, if investments in fixed capital are declining. Who is leading the decline? Is it government? Is it public corporations such as ESKOM and Transnet? Or is private businesses that is holding out on acquiring fixed capital in South Africa. The chart below shows the growth rate for for the three aforementioned industry types per year.
As the bar chart above shows, GFCF for General Government showed strong growth from 2011 to 2015, but then the brakes were slammed on GFCF by government, as it is looking to curb it's spending due to its inflating budget and the fact that tax revenues collected is slowing due to the sluggish economy. While the general government has slowed its GFCF, it has been in decline for two years for private businesses. No clearer indication of business sentiment, than private business spending on fixed capital in the country. And businesses, be they local or foreign are not exactly doing backflips with excitement regarding South Africa's economic prospects. And there are couple of possible reasons for this:
- Political instability (Think land ownership issues and expropriation of land claims and statements being made in the political arena)
- Sluggish economic growth and prospects
- Better future returns in more lucrative markets (leading to less foreign investments in SA)
So in which areas of the economy have we seen the biggest slow down in GFCF? The chart below highlights some of the main contributors to the slowing GFCF in South Africa.
As can be seen from the bar chart below, GFCF for 2016 was negative more most of the major categories with only Transfer Costs showing an increase. All other categories showed declines in GFCF in 2016. With the biggest decline being shown by Mineral Exploration. Guess no miner wants to go dig and look for new underground reserves when they not fetching close to prices they need to make additional exploration and expansion profitable.
Another big decliner being Machinery and other equipment. And this shows in South Africa's trade data too, as the value of machinery and equipment being imported by South Africa declining in recent months.
Another big decliner being Machinery and other equipment. And this shows in South Africa's trade data too, as the value of machinery and equipment being imported by South Africa declining in recent months.
South Africans should be concerned when reading this. As a lack of growth in fixed capital investments is a clear sign that local businesses, foreign investors and the like are not very confident in South Africa's economic prospects in future. If they were, large scale capital investments would be taking place to take advantage of future economic growth in South Africa.
And slowing GFCF by general government suggest that either government is struggling with funds (I.e tax revenue collections not growing fast enough to cover government's ever ballooning budget) or resources are being diverted away from fixed capital assets into other areas, such more larger amounts of money being paid to social grants recipients for example.
No matter how we look at this, lack of GFCF now will lead to lower than potential economic growth in future.
Data sources:
www.statssa.gov.za
And slowing GFCF by general government suggest that either government is struggling with funds (I.e tax revenue collections not growing fast enough to cover government's ever ballooning budget) or resources are being diverted away from fixed capital assets into other areas, such more larger amounts of money being paid to social grants recipients for example.
No matter how we look at this, lack of GFCF now will lead to lower than potential economic growth in future.
Data sources:
www.statssa.gov.za