Some impacts of South African FDI flows on the current account balance

Abstract

There has been a significant surge in capital flows to emerging market economies over the last decade. This paper analyses South Africa's experience with FDI flows. The paper highlights the South African experience in an international comparative context. The results indicate that South Africa has performed below-par (on-par) with comparator countries in terms of FDI inflows (outflows). Since 2004, the South African economy has become increasingly dependent on capital inflows to finance the widening current account deficit. While FDI inflows have been much smaller than portfolio flows, net dividend payments on FDI flows (non-FDI flows) made up 36 per cent (15 per cent) of the current account deficit for the period 2004 to 2012. Unless there is a significant rise (decline) in the exports (imports) of goods and services, the South African economy will be dependent on foreign capital inflows to offset the investment income repayments and the current account deficit. The policy challenge is to promote FDI that enhances exports production and economic growth. In this regard, the nature of the FDI, the manner in which it is funded and the impact on the current account and economic growth are important characteristics that warrant special attention when devising policies to promote FDI inflows.