Policy Paper 45
Over the past decade, South Africa has experienced a pronounced and persistent decline in fixed investment, with real gross fixed capital formation contracting and capital stock growth slowing to near zero. Investment to GDP fell to 13.9% in 2025, excluding COVID the worst ratio since 1950. This paper documents the stylised facts of the investment slowdown and examines its underlying drivers. It argues that weak business confidence, elevated political and economic uncertainty, rising long-term real interest rates associated with fiscal deterioration, and unproductive public-sector investment have jointly constrained private capital formation. Using survey-based measures of sentiment and uncertainty, together with simple econometric tests, the paper finds evidence of a meaningful relationship between business confidence and private-sector investment, including indications of Granger causality and cointegration. At the same time, higher borrowing costs and limited evidence of fiscal crowding-in have further dampened capital deepening. The consequence has been stagnant capital accumulation, declining capital productivity, and subdued economic growth. The paper proposes a focused reform agenda aimed at restoring a virtuous cycle between confidence, investment and growth. Scenario analysis suggests that under a credible reform and fiscal consolidation pathway, growth could rise toward and potentially exceed 3 percent, materially improving employment and poverty outcomes.
Keywords: Investment, business confidence, growth
