EQUIPAMIENTOS COMUNITARIOS (7)

In discussing the factors that make South Africa an attractive FDI location for investors, Chapter Three highlighted the fact that South Africa is a financial hub for regional markets, that it has a well-developed financial sector and that its stock exchange, the Johannesburg Stock Exchange (JSE) is ranked as one of the best in the world. In 2015 the financial sector was described as follows: “South Africa has a sophisticated financial structure with the JSE Securities Exchange, a large and active stock exchange that ranks 18th _{in the world in terms of total market capitalisation}

as of March 2009” (IBP Inc., 2015: 64). As noted above, South Africa was limited in its ability to attract FDI but between 1994 and 2014 the financial sector, much like the mining sector, received some unusually large investments. The South African Investment Business Guide noted the following in 2015 (IBP Inc., 2015: 64-65):

Despite numerous positive economic achievements since 1994, South Africa has struggled to attract significant foreign direct investment. The situation may have started to change, however, with 2005 seeing the largest single FDI into South Africa when Barclays bought a majority share in local bank, ABSA Group Limited.

In addition to this, after 10 years of fostering closing trade relations, 2007 marked one of China’s most significant investments, which was made into the financial industry. The Industrial and Commercial Bank of China acquired a 20 per cent stake in Standard Bank, the largest bank in Africa, for US$5.5 billion (Nxumalo, 2013).

FDI into the financial services sector is different from that of the mining and manufacturing services sectors for two distinct reasons. The first of these is that the sector experienced the highest levels of overall FDI overall between 1994 and 2014, averaging 44 per cent per annum between 1994 and 2004 (excluding data for 1995 and 1997) and 24 per cent per annum between 2005 and 2014. These average increases are significantly higher than the other two sectors. Secondly, the financial services sector was the only sector which experienced two consecutive years of decline, decreasing from 2001 to 2002 and then again from 2002 to 2003. Given that the declines in FDI

into the financial sector is over two consecutive years, the following analyses to what extent these declines were attributable to increased political risk simultaneously.

4.4.1 Decline in FDI in 2002 and 2003

FDI into the financial services sector increased significantly in the period preceding the decline in 2002 and 2003. Between 1998 and 2000, the financial services sector experienced exceptional growth in FDI. In 1998, 1999 and 2000 FDI increased by 36 per cent, 258 per cent and 23 per cent respectively. FDI, however, slowed down substantially in 2001 to a mere 1 per cent before declining 37 per cent in 2002 and a further 8 per cent in 2003.

The above analysis highlights that 2002 was the only year during which all three sectors experienced a decline, but the financial services sector experienced the greatest decline. Additionally, FDI into the other two sectors rebounded in 2003, while FDI into the financial services sector decreased for another consecutive year. In 2002 FDI into the financial services sector declined by 37 per cent compared to the 35 per cent decline in the mining sector and the 25 per cent decline in the manufacturing sector. In 2003, FDI into the mining and manufacturing sectors rebounded showing 28 per cent and 29 per cent growth, respectively. Yet, FDI into the financial services sector decreased again by 8 per cent. The financial services sector, therefore, experienced the largest decline in FDI in 2002 and was the only sector, of the three major economic sectors reviewed in this study, to experience a decline in FDI in 2003.

Consideration of broader national and global FDI data indicates that the decline in FDI into the financial services sector in both 2002 and 2003 followed the national and global FDI trend. It is of significance to take cognisance of the fact that national and global FDI flows also dropped for two consecutive years, both reflecting significant declines. National FDI flows decreased from 5.58 per cent of GDP to 1.36 per cent and to a mere 0.42 in 2003. Global FDI flows halved from 4.13 per cent of GDP in 2000 to 2.11 per cent in 2001, 1.73 per cent in 2002 and to only 1.44 per cent in 2003. FDI flows into Africa decreased from 3.19 per cent of GDP to 2.28 per cent of GDP between 2001 and 2002. Taking these global and regional FDI trends into consideration, the following will consider to what extent the specific decline in FDI into the financial services sector was attributable to increased political risk.

In 2002 and 2003, when FDI into the financial services sector decreased, there was no evidence of increased political risk to investors in South Africa. Once again it needs to be highlighted that, as in the above analysis of the declines in FDI in the mining and manufacturing sectors in 2002, political risk did not notably increase between 1994 and 2003. Thus, political risk did not increase during the years of decline in FDI into the financial services sector, nor in the period preceding this decline.

The political risk assessment of South Africa indicated that the majority of the political risk indicators assessed posed low to medium risk to investors between 1994 and 2003, with no identifiable period of increased risk. Approximately 9 of the 13 political risk indicators assessed were considered to pose medium to low risk to investors. These indicators include government stability, investment freedom, internal conflict, external conflict, military involvement in politics, religious tensions, rule of law (forming part of law and order), ethnic tensions and democratic accountability. The remaining four indicators, including socioeconomic conditions, order (as part of law and order), bureaucratic quality and labour policy all posed medium to high risk between 1994 and 2003, once again with no period of increased risk identifiable. From this data, a preliminary conclusion can be drawn that the decline in FDI into the financial services sector in 2002 and 2003 was to a lesser extent attributable to increased political risk, primarily given the absence of increased risk.

Analysis of broader data, and taking into consideration global and regional FDI trends, indicates that global factors may have played a greater role in this decline. The following extract from the UNCTAD (2003: xiii) World Investment Report highlights why.

Global FDI inflows declined in 2002 for the second consecutive year, falling by a fifth to $6651 billion – the lowest level since 1998. Flows declined in 109 of 195 economies. The main factor behind the decline was slow economic growth in most parts of the world and dim prospects for recovery, at least in the short term.

In addition to this, it was also noted that the fall in global FDI among developing markets was the largest in Africa, reflecting a decline of 41 per cent in FDI inflows compared to inflows in the developed world which fell by only 22 per cent (UNCTAD, 2003b: 3)

From the above data it can be concluded that the decline in FDI into the financial services sector was to a lesser extent attributable to increased political risk for two key reasons. The first of these is that there was no notable period of increased political risk in South Africa between 1994 and 2003. Secondly, in light of reduced global FDI flows, and such a reduction stated to be the highest in Africa, it can be concluded that the decline into the financial services sector was to a greater extent attributable to global factors and to a lesser extent attributable to increased political risk. Table 4 below provides a summary of the conclusions drawn in the above analysis.

Table 4: Declines in FDI in SA attributable to increased political risk for 1994 to 2014

MINING MANUFACTURING FINANCIAL SERVICES

2000 N* 2002 N 2002 N 2002 N 2003 N 2008 N 2011 Y 2012 Y* 2014 N 2014 N

*Y (for Yes) - Decline in FDI attributable to increased political risk to a greater extent *N (for No) - Decline in FDI attributable to increased political risk to a lesser extent

(Source: Produced by the author for the purposes of this study from above analysis)

In conclusion, Table 4, above, reveals that with the exception of the declines in 2011 into the manufacturing sector and in 2012 into the mining sector, all other declines in FDI in South Africa between 1994 and 2014 were to a lesser extent attributable to increased political risk. These

declines were to a greater extent attributable to regional and global factors. Furthermore, as evidenced by the data and analysis above, with the exception of 2002, during which FDI into all sectors declined, declines in FDI occurred at different times. It can thus be concluded that sector- specific declines differed markedly.