07/12/17

Gross fixed capital formation

The National Accounts and Gross Fixed Capital Formation

In collaboration with Nedbank: Nedbank Namibia CIB Newsletter – September 2017

Namibia currently finds herself in challenging times, facing the longest recession since 2009. Many factors have contributed to this, but one of the most notable and oft-cited is the rapid collapse of the large tracts of the construction sector. Many would argue that the slowdown of this industry in 2016, and into 2017, is exclusively due to government cutting back on new capital projects and delayed payments for current or completed projects. While this narrative is often portrayed in the media or suggested by anecdotal evidence, the data released by the Namibia Statistics Agency in the final 2016 National Accounts suggest a more complicated story.

Gross fixed capital formation

To find the root cause, one can take a closer look at the gross fixed capital formation (GFCF) data. GFCF is essentially the increase in fixed capital within the economy (such as land improvements, plant and machinery purchases, and the construction of mines factories and other buildings) in a single period, in this case, a year. In short, it is a measure of the value added in fixed assets within the Namibian economy, or in lay terms, the investment into new fixed capital. This fixed capital can take many forms, but is usually largely driven physical infrastructure investment, both productive and unproductive.

As anecdotal evidence suggests, the 2016 National Accounts show a major reduction in GFCF in 2016 when compared to 2015, with a fall from N$50 billion of new fixed capital formed in 2015, to just N$39 billion in 2016. When adjusted for inflation, this represents a 25% fall – a major decline in a single year.

What caused this?

Historically the two largest contributors to GFCF are producers of government services, and mining and quarrying. Gross fixed capital formation by the mining sector grew by 109% in 2013 and 33% in 2014, as the Husab, Otjikoto and Tschudi mines were being built. However, with the construction of these mines drawing to a close in 2015, we see this fall by 10% in 2015 and a whopping 51% in 2016. While total gross fixed capital formation fell by 25.3% in 2016, investment by producers of government services fell by around 1% compared to the aforementioned drop of 51% in mining and quarrying. Mining and quarrying’s contribution to total gross fixed capital formation dropped from 37% in 2015 to only 24% in 2016. Again, this can be attributed to the completion of the mining projects in 2015 and therefore less investment in fixed capital. GFCF by type of asset – construction works – grew by 69% in 2013, 76% in 2014 and 29% in 2015, before falling by 29% in 2016. This clearly shows the link between the construction boom and the building of three major mines.

The wider impact

The winding down of mine construction means less work and subsequently less income for construction firms. As a result, construction firms buy fewer locally-produced goods and reduce staff numbers to manage costs. With less locally-produced goods purchased, those domestic producers have less revenue. The now unemployed construction workers no longer have an income, and thus are unable to purchase goods and services. This leads to a second round of impacts as government then receives less in corporate, income and value added taxes. As a result, government has little option but to reduce expenditure, and cut capital expenditure. This further compounds the impact on the construction sector and wider sectors, essentially creating a negative feedback loop. The result is not only a reduction in consumption, but also a reduction in output. This is the situation we find ourselves in now, with sluggish growth, a struggling private sector and a government trying to reign in debt through fiscal consolidation.

Consequences

We are seeing significant negative consequences in the construction industry, through layoffs and firm closures, and into the wider economy as result. However, it is important to note that growth in the construction sector is transitory. The contraction we see now is a return to ‘normal’ levels after the boom caused by the simultaneous mining projects and large capital budgets over recent years.

Source: National Accounts