We have an investment strike! Reviving SA’s economy through domestic investment

Domestic investment, commonly known in economics as gross fixed capital formation (GFCF), is a critical driver of sustained and accelerated economic growth. It encompasses the total value of purchases made by the government, state-owned enterprises and the private sector of fixed assets, including infrastructure, machinery, equipment and buildings.

At its core, domestic investment focuses on enhancing the economy’s productive capacity, boosting competitiveness and creating a foundation for future job creation and income growth. Sustained high levels of investment at between 25% and 30% of GDP are needed in South Africa to get the economy to grow above 3%.

Domestic investment plays a vital role in driving economic growth, enhancing productivity and generating employment opportunities. Consistently high levels of GFCF are often indicative of a nation on a positive growth trajectory, where increased capital investment leads to better living conditions, technological progress and stronger economic resilience.

Moreover, GFCF is closely linked to investor confidence and future outlooks – when businesses and the government invest in long-term assets, it reflects a positive sentiment and a commitment to the country’s development and prosperity.

In emerging economies such as South Africa, where unemployment and inequality are deeply rooted, domestic investment – particularly in infrastructure – is crucial for fostering inclusive growth by boosting short-term economic activity and enhancing long-term productivity and access.

Despite its vital role in economic growth, South Africa’s GFCF as a proportion of GDP has been alarmingly low and on a downward trend for over a decade, falling from around 24% in 2008 to below 15% in recent years, significantly short of the National Development Plan’s 30% target.

This sharp decline signals deeper structural issues in the economy. South Africa has been trapped in a low-growth, low-investment environment where a lack of investor confidence, policy uncertainty and deteriorating public infrastructure deter both private and public sector capital expenditure.

In 1993, at the dawn of the new democratic dispensation, the domestic investment to GDP ratio was as low as 11.2%. By 2010, with the Fifa World Cup in SA, investment peaked at 18.7%, and in 2024 it had dropped back to 14.2%. In the first quarter of 2025 the ratio was even lower at 13.5%.

From 2010 to 2025, GDP annual average growth was only 0.3% while domestic investment was a very disappointing -0.12%. This sustained decline reflects waning investor confidence, policy uncertainty and weak economic fundamentals. Low investment undermines future productive capacity, employment creation and long-term economic growth potential.

Figure 1 illustrates domestic investment at constant prices from 2010 to 2025, disaggregated by the government, state-owned enterprises (SOEs) and the private sector, revealing a clear trend of decline and stagnation.

Government and SOE investment dropped from 6.3% of GDP in 2010 to 3.9% in 2025, while private sector investment decreased from 11.5% to 9.7% over the same period.

Additionally, the ratio of private to public investment shifted significantly from 1.8:1 in 2010 to 2.3:1 by 2025. This indicates severe fiscal constraints, inefficiencies in public investment management and weakened state capacity to drive infrastructure development, which traditionally plays a catalytic role in crowding in private investment.

The private sector is increasingly disengaged owing to uncertainty, infrastructure bottlenecks, regulatory issues and energy challenges. The rising ratio does not reflect strength in private investment, but rather relative collapse of public sector investment.

Table 1 presents a summary of investment by type from the first quarter of 2010 to the first quarter of 2025, highlighting a clear structural shift. Most categories have seen a decline in their contribution to overall investment, apart from machinery and related equipment (including computers), which increased by 23.8%, the only category showing positive growth over the period.

This suggests a structural shift towards more capital-efficient, tech-based investment likely driven by cost-cutting, automation and digital transformation. However, the decline in construction-related investments reflects stalled infrastructure and housing development, further hampering job creation and urban development.

Table 2 indicates the contribution of the various sectors to investment from 1995 to 2024. Over the 30-year period, only three sectors had positive growth rates namely trade (with catering and accommodation), agriculture and manufacturing. All the other sectors had negative growth rates.

The economic base sectors (agri, mining, manufacturing and tourism) did well with a combined contribution to investment in 1995 of 37.5%, which increased to 41.3%.

These gains suggest potential green shoots in export-linked or value-added sectors, but broader deindustrialisation and disinvestment remain a concern: Electricity, water, finance and transport, which are critical for economic infrastructure, all saw sharp declines. Mining investment (-15.5%) declined despite being a traditional backbone, likely owing to policy and regulatory uncertainty.   

Several key factors contribute to South Africa’s weak investment performance:

• Low economic growth and business confidence: Investors, as rational decision-makers, allocate capital where they anticipate future returns. However, South Africa’s weak economic performance, averaging below 1% annual growth over the past decade, has diminished these expectations. Adding to this, political instability, corruption scandals and governance shortcomings have significantly weakened business confidence;
• Energy, infrastructure and supply-chain constraints: The persistent electricity crisis has severely hindered production and heightened operational risks for businesses. Load shedding deters investment, particularly in energy-intensive sectors such as mining and manufacturing. When combined with inadequate infrastructure investment and maintenance, the overall appeal and value of investing have been significantly diminished;
• Policy uncertainty, lack of a strategic plan and regulatory complexity: South Africa’s record of shifting policies, ranging from land expropriation without compensation debates to unclear mining regulations, has created uncertainty that inhibits new investment;
• Government fiscal constraints: Government debt has reached a fiscal cliff of 75% to GDP. This growing debt weak financial management with ineffective expenditure have significantly reduced capital budgets and investment in especially infrastructure; and
• Poor governance, weak leadership, poor institutional capacity and ongoing corruption: Poor governance and corruption are deeply entrenched in all spheres of government, and transgression has no consequences.

The data indicates entrenched structural weaknesses such as poor governance, limited strategic planning and weak leadership, and a lack of investor trust. If South Africa is to break free from the current cycle of stagnation, decisive action is needed to revive domestic investment. The following policy interventions are essential:

• Build infrastructure capacity and well-functioning supply-chain systems;
• Implement a plan, create policy certainty, and reduce regulatory complexity;
• Restore good governance at all levels including municipal and SOE capacity;
• Boost business confidence and support SMEs;
• Leverage the green economy potential and digital transitions;
• Crowd in private investment, simplify investment processes and provide targeted incentives for manufacturing and technology upgrades;
• Sectoral investment strategy: Leverage growth in agriculture, manufacturing and trade to drive reindustrialisation and rural development; and
• Improve investment efficiency: Use public-private partnerships (PPPs) and performance-based budgeting to ensure quality and accountability.

Conclusion: A time for good governance and new bold leadership

The South African economic ship needs to change direction through various structural change strategies. Domestic investment is a critical driver of economic growth and development.

We need to escape the downward spiral of stagnant growth and increasing unemployment. Restoring investor confidence is one of the strategies through good governance, clear policy guidelines and by reducing regulations.

Achieving this will require strong political leadership and a firm commitment to long-term national development over short-term political interests. DM

Note: Data is from StatsSA, 2025.