Dividend outflow risky for SA

THERE is nothing like a mega-deal to get politicians beating their breasts and proclaiming it “a vote for the future of South Africa”.

But after the fervour for the investment fades and the billions are brought into the country, then begins the slow burn of paying back the new foreign owners in dividends. There is nothing wrong with this. No one would invest if they could not make money from it.

But in South Africa’s case, the outflow of dividends is nearly double the inflow.

For a country running a large current account deficit of about 5.1% of gross domestic product, or R179billion, the hefty outflow of dividends is unhelpful.

The current account deficit is a measure of all the trading in goods and services, and dividends flowing in and out of a country.

This is concerning, because it leaves a country vulnerable to a global financial shock. And with so much money leaving South Africa, there is less to reinvest locally to create jobs.

According to asset manager Stanlib, R44.3-billion left South Africa in the third quarter of last year in “net dividend outflows”, up from the R43billion of the previous quarter.

This meant that more money was leaving South Africa in those three months than was coming in.

Stanlib said this reflected South Africa’s increased “offshore investment diversification as well as the more recent focus on investing in the rest of Africa”.

Already, the outflow of dividends represents 1.3% of South Africa’s GDP — a constant drain on the current account.

This trajectory worries Finance Minister Pravin Gordhan, who hinted in his February budget speech, that he would like greater dividend inflows.

He said foreign assets owned by South African companies were an important source of income as “they reduce our vulnerability to future domestic downturns”.

Cezanne Samuel, an economist in the Department of Trade and Industry’s international trade and economic development division, wrote a report, The dark side of foreign direct investment: a South African perspective, detailing the negative effect of large deals.

One such negative effect, she said, was that in tough times a company would look to maximise shareholder value by hiking dividends, rather than productively reinvesting profit, which compounded the problem.

“As investment outflows rise, it reflects negatively on the current account. Furthermore, decisions to reinvest earnings into [existing] brownfield investments, where companies expand existing facilities, rather than declaring dividends, are important,” she said.

Samuel said the government should not veto foreign investment, but look to introduce policies to woo investment that focused on ploughing profits back into South Africa, rather than repatriating them.