Estimation of the private investment functions for the South African economy

Abstract

In recent years, private investment has been recognised as a vital engine for economic growth. This growing significance of private investment is largely due to the need to revive global economic growth and consequent job creation following the 2008 global recession. Governments are operating at, or close to, the limits of their respective fiscal budgets because of the stimulus packages. It has therefore become critical to completely understand the drivers of private investment given the different macroeconomic contexts of different countries. Historically, much of the policies to stimulate private investment were based on investment theories established in the developed economies. However, performance of the investment theories in developing countries yielded mixed results. That led to studies focussed on developing countries with a view to develop relevant neoclassical investment theories for developing countries. Initially, such studies were based on a group of developing countries such as Sub-Saharan African countries. The heterogeneity of developing countries within the group impacted on the validity of the results, necessitating the need for a focus on specific individual countries. This study follows this latter approach and is an attempt to estimate the private investment function for South African economy using the multiple regression model. This study is relevant because recently, private investment in South Africa has declined from the peak of 74% of total investment in 2005 to the current level of 63%. This study contributes to the debate on how to reverse this declining trend of private investment. To this end, the relevant data was collected and analysed. The results of the study revealed that private investment in South Africa is positively influenced by an increase in public investment, in savings rate, and the narrowing of the output gap while negatively influenced by increasing uncertainty, interest rates and to a limited extent real exchange rate appreciation.These empirical results suggest that public investment in core infrastructure— though declining—does ‘crowd in’ private investment. Reduction of uncertainty, together with improved quality and policy certainty, will enhance South Africa’s international standing as an attractive investor destination. This way, South Africa will be able to attract some of the huge global savings for domestic investment- one of the benefit of being an open economy. This is despite South Africa’s relatively low domestic savings rate. The significance of economic growth cannot be overemphasised in terms of creating investment opportunities. Economic growth creates investment opportunities. Further, managing inflation and inflation expectations should be conducted with due consideration for impact of monetary policy on private investment.