SITTING ON A PILE OF CASH
The huge growth in corporate cash reserves, at the same time as private sector fixed investment has all but dried up, suggests to some we’re in an investment strike, to others a complete lack of confidence
SA’s corporate sector is sitting on more than R1 trillion in cash reserves. Yet fixed investment is barely growing and firms continue to shift their investments and operations abroad. New research by the University of Johannesburg’s Centre for Competition Regulation & Economic Development (CCRED) shows the cash reserves of the JSE’S top 50 companies (excluding dual- or multilisted entities) rose to R1.4 trillion last year from R242bn in 2005.
This counters the belief that SA’S low savings rate is undermining investment. It also counters the claim that the Reserve Bank’s failure to lower interest rates is stifling investment. The cost of borrowing can’t be an inhibitor to investment if firms don’t need to borrow.
On average, CCRED finds that it was the banking sector that held on to most of the cash, investing just over R10bn in SA, while hoarding R25bn in cash over the 2005-2016 period.
Regulatory capital requirements fail to explain why the banks have been hoarding cash. A separate study found that Capitec Bank, for example, exceeded its liquidity coverage ratio by over 1,000% between 2013 and 2015, the three years covered by the CCRED study.
Investments measured in terms of mergers and acquisitions show the most valuable deals done by the top 50 companies took place outside SA; only 39% of these deals took place in SA, says CCRED. Last year, deals outside SA accounted for R71bn of M&A activity, while deals within SA accounted for just over R10bn. So is business on an investment strike? Cosatu’s Neil Coleman thinks so. Writing in the Daily Maverick, he accuses business of having stripped SA of capital since 1994 through the building-up of large cash reserves; by setting up dual or primary listings outside the country; shifting their surpluses to finance offshore operations; and through tax evasion and the use of tax havens, among other things.
Thando Vilakazi, a senior economist at the CCRED, however, prefers to say that SA is simply experiencing particularly stagnant levels of investment.
The CCRED data shows corporate reserves started rising sharply from 2009, which coincided with the global financial crisis and the election of Jacob Zuma as president. For most of this period, SA’S GDP growth rate has declined each year, according to World Bank data.
In 2015 and 2016, fixed investment by private enterprises contracted steadily. Economic conditions have to be dire for private fixed investment to contract: it suggests firms are not even maintaining existing plants, never mind expanding.
Nobody disputes this has been bad for growth. But it seems perverse that SA companies see more benefit in investing abroad, creating growth and jobs in other countries, than at home. The worry is until domestic fixed investment picks up, the economy will fail to recover.
Those on the left, like Coleman, would like to discipline this “footloose, extractive capital”. They advocate the introduction of prescribed asset and lending requirements to ensure banks lend to the productive sector; strict conditions on outward investments and dual listings; and the possible use of capital controls to contain dividend outflows and capital flight.
But while such policies might help in the short term, they would not address the root cause of why firms are failing to invest at home. It would probably also frighten off what little foreign direct investment remains by suggesting that things are so bad in SA that government has to coerce its own firms to invest at home.
Vilakazi says high levels of uncertainty, negative business sentiment and difficult economic conditions explain why firms are reluctant to undertake large investments.
Nedgroup Investments says as corporate confidence falls, corporates tend to hoard more cash rather than spend it. This is borne out by the data which shows a negative correlation between the growth in corporate cash balances and the SA Chamber of Commerce & Industry’s (Sacci) business confidence index.
“In a low-growth environment, institutions are more likely to hold cash than invest, and this inevitably results in higher reserves across the corporate sector,” says Andries du Toit, Firstrand group treasurer. “Policy uncertainty contributes to this trend.”
What it means: Uncertainty, negative business sentiment and tough economic conditions explain why firms are reluctant to invest
One of the chief reasons business gives for lower confidence, especially since Zuma sacked former finance minister Nhlanhla Nene in December 2015, has been rising policy and political uncertainty. This is borne out by the Bureau for Economic Research’s political constraint indicator, which measures manufacturers’ perception of political risk. By the end of 2016 it was higher than in 1993, when 80% of respondents cited the political climate as a constraint on their business. This indicator is closely correlated with SA’S quarterly, annualised GDP growth rate as well.
Capitec CEO Gerrie Fourie says the extended, weak economic environment in addition to political uncertainty would make any bank cautious to lend. But he attributes the bank’s hefty cash reserves (which topped R16bn in February 2017, against R473m in February 2005) to increased profits as the bank has grown. It has consistently maintained its annual dividend payout ratio at 40% of profits over this period.
“Any change in our reserves is due to the growth of the bank over this period rather than holding back on investment.”
Fourie also says Capitec’s strong liquidity has nothing to do with holding on to cash and not investing. “Our approach . . . has been to manage liquidity very cautiously.”
Firstrand’s Du Toit says regulatory requirements, such as those of the Basel Committee on Banking Supervision, have led to higher