FDI in Africa: potential implications of Brexit on South Africa’s financial sector
| DOI | https://doi.org/10.1108/JFRC-04-2018-0061 |
| Pages | 114-129 |
| Published date | 28 August 2019 |
| Date | 28 August 2019 |
| Author | Silindile Nomfihlakalo Buthelezi |
FDI in Africa: potential
implications of Brexit on South
Africa’sfinancial sector
Silindile Nomfihlakalo Buthelezi
Department of Commercial Law, University of Cape Town,
Cape Town, South Africa
Abstract
Purpose –This paper aimsto investigate whether any potential weakeningof the UK’sfinancial sector, as a
result of Brexit, willhave a negative impact on South Africa’sfinancial sector given the close tiesbetween the
countries’financialsystems. This paper seeks to also argue that Brexit mayprovide an opportunity for South
Africa to pursuenew trade linkages with other countries in Africa and Asia.
Design/methodology/approach –This paper is a review of relevant sources from foreign direct
investment (FDI) and international economic literature. It analyses comparative and cross-disciplinary
research and examines the current trends in the legal and economic climate in South Africa –within the
contextof economicgrowth and FDI inflows patterns.
Findings –This paper finds that Brexit does not posea systemic risk to South Africa’sfinancial system.
This paper also finds that South Africa’s recent policy changes may serve as obstacles to South Africa
attractingnew FDI.
Research limitations/implications –The implications of Brexit on the investmentin the economy of
African countriesare under-researched, and this paper provides an additional contributionto the euro-centric
discussion of the ramifications of Brexiton the economic developments in the financial sector after Britain’s
exit.
Originality/value –This paper argues for an enhanced FDI system for South Africa and its policy
proposalscan be used to further the independence of African countriesfrom European investment streams.
Keywords United Kingdom, Financial sector, South Africa, Banking reform, Brexit,
Foreign investment
Paper type Research paper
Introduction
In the recent years, South Africa has been experiencing challenging times in respect of its
economy. According to the recent EY Africa attractiveness report, the year 2016 indicated to be
the most damaging year for economic growth across sub-Saharan Africa in over 20 years –
foreign direct investment (FDI) was a major contributing factor to this slow economic growth
(Ernst and Young, 2017). With regard to South Africa specifically, the United Nations
Conference on Trade and Development (UNCTAD) World Investment Report 2016 revealed
that FDI flows into South Africa decreased an estimated 74 per cent to $1.65bn in 2015
(UNCTAD, 2016). Although the 2017 UNCTAD World Investment Report indicated a 31 per
cent upsurge of FDI flows into South Africa to $2.3bn in 2016, the figure is seen as an under-
performance on the part of a country that has been dubbed “Africa’s economic powerhouse”
(UNCTAD, 2017). Furthermore, South Africa’s ranking in the list of top prospective investors
took a decline in 2016 (UNCTAD, 2017).
In 2017, South Africa’s economic growthfurther weakened as the country entered into a
“technical recession”when the economy underwent two consecutive quarters of negative
JFRC
28,1
114
Received3 April 2018
Revised26 June 2019
Accepted26 June 2019
Journalof Financial Regulation
andCompliance
Vol.28 No. 1, 2020
pp. 114-129
© Emerald Publishing Limited
1358-1988
DOI 10.1108/JFRC-04-2018-0061
The current issue and full text archive of this journal is available on Emerald Insight at:
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economic performance –as a result of a gross domesticproduct (GDP) decline of 0.3 and 0.7
per cent during the fourth quarter of 2016 and the first quarter of 2017, respectively
(Statistics South Africa,2017). South Africa’s weakened economic outlook continuedin 2017
when Standard and Poor (S&P) downgraded the country’s local currency debt rating from
BBB to a “junk rating”of BBþ(Standardand Poor, 2017). According to economist analyses,
the downgrade by the credit rating agencies may havethe effect of worsening the country’s
fragile economic situation of its distressingly high levels of debt –South Africa’s public-
debt-to-GDP ratio reached 50 per cent in 2016 (Standard and Poor, 2017). According to the
2017 South African Reserve Bank (SARB) Monetary Policy Review, South Africa also
underwent continued depreciation of its currency from 2014 to 2016, owing to loss of
investor confidenceas a major contributing factor (SARB,2017).
Fostering a strong economy is of increasing importance for South Africa, specifically
after the 2008 global financial crisis, and attracting FDI is consideredby many countries as
central to facilitating economic growth (Albassam, 2014). In 2008, the organisation for
economic cooperation and development (OECD) released the fourth edition of the OECD
benchmark definition of FDI. This benchmark definition serves to set the “world standard”
for direct investment conceptual definitions and statistics (OECD, 2008). According to the
benchmark definition, direct investment is broadly defined as “[...] a category of cross-
border investment made by a resident in one economy(the direct investor) with the objective
of establishing a lasting interest in an enterprise (the direct investment enterprise) that is
resident in an economy other than that of the direct investor”(OECD, 2008). The OECD
defined the objective of the foreign direct investor as developing a “strategic long-term
relationship with the direct investment enterprise to ensure a significant degree of
influence...[and] direct investment may also allow the direct investor to gain access to the
economy of the direct investment enterprise, which it might otherwise be unable to do”
(OECD, 2008). Much academic debate has surrounded the potential linkages between FDI
and economic growth. Some authorities argue that massive inflows are often linked to the
economic prosperity of a nation (Choong et al., 2004). More specifically, Iamsiraroj and
Ulubasoglu argue that FDI offers significant advantages to developing countries mainly
because such countries are unable to “exploit the benefits from their abundant natural
resources due to inadequate human and physical capital and technological know-how”
(Iamsiraoj and Ulubasoglu,2015). Other authorities share the view that FDI, on its own, does
not have positive effects on economic growth(Gui-Diby, 2014). As asserted by Choong et al.
(2004) any advantage derived from FDI flows shall not arise automatically, but will rather
be dependent on the existence of what is referred to as “absorptive capacities”of the
receiving country. In other words, thereare certain conditions that need to be present in the
receiving country’s economy prior to realizing the benefits of FDI. Such factors and/or
conditions include, but are not limited to: political stability (Albassam, 2014); governance
and institutional quality (Kechagia and Metaxas, 2018); macroeconomic stability
(Balasubramanyam et al., 1996); the rule of law and accountability (Kechagia and Metaxas,
2018); regulation (Albassam, 2014); and domestic financial sector development (Choong
et al., 2004). This paper will not present a detailed discussion of the various arguments
relating to the existence of a correlation between FDI and economic growth. Such an
analysis is beyond the limits of this paper. However, this paper will, without going into
technical detail, discussthe importance of the abovementioned absorptive capacities as they
relate to promoting FDI in SouthAfrica.
The significance of these factors or absorptive capacities is that the instability and
unpredictability of these existing conditions, especially in the context of South Africa, has
significantly contributed to South Africa’s declining FDI inflows and weakening economic
Potential
implications of
Brexit
115
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