Fixing the foundation: Rethinking gross fixed capital formation in a high-debt economy

By Bontle Setshedi, Junior Analyst at Tamela

The South African Reserve Bank’s March 2025 Quarterly Bulletin reported a decline in real gross fixed capital formation of 3.7% in 2024 after a 3.9% increase in 2023. This downturn raises concerns about the current state of fixed investments in South Africa and the impact on economic growth.

Deteriorating infrastructure, such as Eskom’s energy issues and Transnet’s aging infrastructure, along with rising public debt, limits the Government’s investment capacity. Despite the Government’s continued commitment to invest in infrastructure – evidenced by the Finance Minister, Enoch Godongwana, announcing an allocation of approximately R1 trillion, over three years, towards infrastructure in the 2025 Budget speech -this level of investment alone will not be sufficient to drive long-term economic growth beyond the 2024 GDP growth rate of 0.6%.

Achieving the country’s national infrastructure goals is projected to cost R6,2 trillion between 2016 and 2040, with a financing gap of R2,15 trillion as of 2021. This highlights the critical need for private sector investment, which is essential to fill the funding gap left by the Government’s fiscal deficit.

Private sector investment in South Africa has remained low from 2021 to 2024. According to StatsSA, fixed investments by private business enterprises declined through Q1 to Q3 of 2024, only showing a modest recovery in Q4 due to improved investor sentiment. This resulted in a -4.1% annual contraction in private investment in 2024, compared to 3% growth in 2023. This decline reflects ongoing concerns around policy uncertainty, energy supply challenges and weak investor confidence.

In response, the Government launched Operation Vulindlela in 2020, a joint initiative led by the Presidency and National Treasury to fast-track structural reforms to aid recovery. Another effort includes a partnership to support anti-crime initiatives through Business Against Crime South Africa, a tech-based enforcement solution.

National Treasury advanced its implementation of recommendations to enhance the Private-Public Partnership policy and legal framework to boost investor confidence. However, it has acknowledged that the legislative changes are insufficient to attract meaningful private sector participation and continues to work on supporting mechanisms to enable broader participation.

In conclusion, implementing structural reforms will be essential to attracting adequate funding to enable the participation of private and public sector investments in critical economic sectors.

For more information, contact Bontle Setshedi on +27 11 783 4907 or bontle@tamela.co.za.