Local companies are not sitting on piles of idle cash
The claim that South African companies have large deposits of “idle cash” in their bank accounts is firmly entrenched in our economic discourse. Yet the reality is that bank deposits are never “idle”.
As Nedbank CEO Mike Brown recently explained, no profit-maximising bank would pay depositors interest for money to accumulate in their bank vaults. All deposits are on-lent to borrowers through the banking system.
Nonetheless, the government and labour continue to point to increased deposits as evidence of an “investment strike” by business, which is seen as hoarding large amounts of cash. As “proof” of this, critics point to the rising bank deposits reported by the Reserve Bank. Bank deposits of companies and close corporations have risen from R60bn in 1994 to R1.7-trillion today. As a share of GDP, they increased from 12% to 40%.
This increase in deposits has mistakenly been attributed to businesses retaining profits. This cannot be so. In looking at only half of the balance sheet, it ignores what money is and how banking operations work. Consider an example where a customer buys goods for R100. The customer’s bank deposits fall by R100 and, initially, the company’s deposits rise by R100. The company uses, say, R90 of the deposits to pay its suppliers, workers and taxes. It is left with R10 profit, of which it pays R5 to its shareholders as a dividend and retains R5 as undistributed profits. As a result of all these transactions, the company’s bank deposits have risen by R5 and the combined bank deposits of its customers, suppliers, government and shareholders have fallen by R5. Overall, bank deposits are unchanged.
This is always the case. Bank deposits cannot increase in aggregate when businesses retain profits. They only change hands. Bank deposits rise when firms or households borrow. When companies borrow, their banks credit their accounts with the specified amounts. Lending banks have created liabilities and assets of equal amounts in their balance sheets.
Company bank deposits have risen because bank lending has risen. They have risen because companies borrowed, not because they retained earnings. Corporates borrowed to fund increased investment, especially from 2000 to 2008. Bank lending to companies rose dramatically over this period. Private sector investment weakened after the 2008 financial crisis and has not recovered. As a result, corporate borrowing has also levelled off and so have bank deposits as a share of GDP.
So the rise in bank deposits is not explained by an “investment strike”. The truth is the opposite. Bank deposits rose over time because companies borrowed to fund investment. This means, too, that when private investment eventually starts to rise, bank deposits will not fall. Bank deposits will shift from the firms that are investing to the suppliers from whom they buy equipment. Ironically, a pick-up in private investment will most probably be accompanied by rising bank deposits, because some of the investment will be funded by new borrowings from the banks. In the process new bank deposits will be created.
This explanation for the rise in bank deposits does not mean that there are no companies with cash on their balance sheets. Rhodes University graduate student Georgie Stuart examined the latest financial statements of the largest 50 companies on the JSE. She found that collectively they have R1.3-trillion in cash. But R436bn of this belongs to international companies such as Richemont and BHP and is not on deposit in SA. A further R691bn belongs to South African banks. It is part of their liquid asset requirements and cannot be considered “idle” by any definition.
This leaves R220bn for SA’s other largest companies. Some of this is not in SA. Moreover, many of the companies have substantial amounts of debt. Net of debt, the remaining cash is not excessive to meet normal liquidity requirements.
Pointing fingers is not helpful, especially when backed by ill-informed claims. Pretending there are easy solutions that will drive up investment blinds us to the effort that is required from all stakeholders working together to make this happen.
As a start, SA needs effective policies that build confidence and support to benefit all its people.
Keeton is with the economics department at Rhodes University. This column is an extract from his presidential address to the Economic Society of SA.
BANK DEPOSITS ROSE OVER TIME BECAUSE COMPANIES BORROWED TO FUND INVESTMENT