The IDC is a minnow in a sea of troubles

The Industrial Development Corporation (IDC) has a noble mission: to act as a countercyclical investor, stepping in when private capital is scarce or risk-averse. However, its impact is limited by its size and resources, which are dwarfed by the magnitude of the challenges facing an economy trapped in the longest downward cycle since 1945.

With the government in fiscal consolidation mode, it is up to business to pick up the slack in boosting the expenditure side of the economy and play a role acknowledged by President Cyril Ramaphosa in the 2022 state of the nation address that “government does not create jobs; businesses create jobs”.

But Ramaphosa must be greatly disappointed by the trends in gross capital formation, a macroeconomic concept that shows investments in fixed assets such as buildings and machinery as well as inventory replacement.

Gross fixed capital formation is barely growing, further exposing shortcomings in Ramaphosa’s efforts to revive the economy with a private sector-led investment binge.

Domestic capital spending has stagnated since the late 1980s, languishing at about 20% of GDP. In comparison, emerging countries in East Asia have seen a steady increase in investment over the same period, from 25% of GDP to almost 40% — propelling countries such as South Korea from being one of the poorest countries of the 20th century to a developed, high-income country in just a few generations.

In an economy that cannot guarantee the supply of electricity or that manufactured goods will reach the ports for exports, it is too risky for private capital to fund new factories, warehouses and machinery. That’s perfectly understandable but it also illustrates the limitations of the private sector when things are bad.

This is where development finance institutions such as the IDC can step in, take on calculated risks to support businesses in the road logistics sector and the renewable energy industry.

Yes, in its latest annual results the IDC ramped up its funding more than twofold, doling out nearly R18bn to businesses across the country. But it is too tiny to make a difference. The IDC’s net lending as a percentage of GDP is well below 1%. This is a modest contribution compared with domestic credit to the private sector as a share of GDP, which measures the financial resources provided to the private sector by financial corporations. According to the World Bank, this was 150.2% in 2019 and 134.4% in 2020.

The IDC’s mandate is commendable, but its capacity is constrained. The IDC is a minnow in a sea of troubles, and its role as a countercyclical investor is marginal at best.

SA needs more than the IDC to tackle its structural problems and stimulate its economic growth. Without these reforms, the IDC’s efforts will be in vain.