Will the private sector come to the party?

2012-04-21 13:19

Pundits in South Africa and beyond are hedging bets on whether the local private sector, which is cushioned by R1.2 trillion in available deposits, will join the state in investing domestically – or inadvertently embark on an investment strike.

The deposits are those of the entire private sector – corporate non-financial deposits sit at R550 billion, insurers and pension funds have R152 billion, and private household deposits are estimated at R568 billion.

While economists debate this, what is certain is that huge pools of bank corporate deposits by local companies climbed to R550 billion.

According to Stanlib, South African companies held about R300 billion in cash deposits in 2006.

The R1.2 trillion is sitting idle and is not invested in the economy for a range of reasons, even though 65% of this cash is held in one-day demand accounts, earning the lowest rates on interest in 30 years.

This is despite corporate earnings rising since the 2009 global economic recession. Debt levels have also dwindled across the balance sheets of corporate South Africa.

Terence Sibiya, an investment banker at Nedbank Capital, says companies were forced to hoard huge piles of cash to protect themselves from incurring more losses as a result of the economic crisis.

“During the economic crisis, many companies cut down on debt and borrowings from banks and capital markets. They also ran down their inventories and built up cash,” explains Sibiya.

He says investors were afraid of a double-dip recession and preferred to sit on cash until the global economic outlook improved.

Sibiya believes some of the cash will be invested in fast-growing African economies, where returns on investment are far higher than in Europe and the US.

“Investors are scouting for opportunities on the African continent, especially in telecoms, infrastructure and resource-rich countries.

“I think infrastructure will eat away some of the cash pile,” Sibiya says.

In January this year, South African corporate deposits in the non-financial sector stood at R520 billion, according to recent figures released by Stanlib.

Department of Trade and Industry Director-General Lionel October dismisses the view that the hoarding of cash by South African companies means they have embarked on an investment strike.

To the contrary, October says, there has been a massive increase in foreign direct investment into South Africa following a big drop in 2009. “Businesses respond to demand. If demand has contracted, companies hold back.”

He says while corporate South Africa may be holding back because of lack of confidence in the recovery, foreign capital is investing at encouraging rates.

“As demand picks up, there will be more demand in the economy, and you will see a reduction in the cash pile that companies are sitting with. I think some of this money will be deployed in South Africa and the African continent,” predicts October.

Experts say the accumulation of cash reserves by companies reflects high levels of uncertainty, weak domestic demand and low confidence in the local economy. The investment climate in the country is also affected by factors such as policy uncertainty and deeper structural problems, such as low rates of return on investment and high costs of capital.

Concerns about the global economy also continue to weigh on investment decisions, as bleak news coming out of Europe indicates that European banks are in a perilous position, and the next 18 months could jeopardise financial stability and economic recovery in the eurozone.

The South African government has announced an expansionary budget, heralding an era of massive public spending in the economy.

 The government plans to spend R1.1 trillion over the next three years to upgrade infrastructure. South Africa may well be returning to the days when 50c of every rand invested came from the state.

Finance Minister Pravin Gordhan has expressed the desire to partner with the corporate sector to revitalise the economy through investment in infrastructure. The government is hoping to raise some of the money from the domestic markets to finance infrastructure.

Recently, Minister of Public Enterprises Malusi Gigaba signalled that the state did not expect to do all the heavy lifting alone and invited the private sector to embark on joint expansionary activity.

Patrick Bond, a political economist from the University of Natal, says the last “capital strike”, which he defines as the failure by large-scale firms to invest, took place between 1994 and 2004, when fixed capital formation was low.

He argues that during this period businesses invested their money, but not in South Africa. Most of the largest stock exchange companies – Anglo American, De Beers, Old Mutual, SA Breweries, Liberty Life, Didata and others – shifted their funding flows and even their primary share listings to overseas stock markets.

The mobilisation of corporate deposits is a global phenomenon. According to January 2012 figures released by JP Morgan Chase, large US companies may be sitting on a $2 trillion cash pile. The figures reveal that there is a
lot of cash on the books and low debt levels.

The bank believes that in the global recession companies were shy to invest and a global capital strike took hold, as well as a pattern whereby corporate investment remains subdued in relation to relative profits.

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