Cape Town - A probusiness budget is crucial to restore local business confidence and trigger a much-needed cash injection into the South African economy, said Sean Segar, head of product at Nedgroup Investments Cash Solutions.
Finance Minister Pravin Gordhan. (Picture: AFP) ~ AFP
Segar feels Finance Minister Pravin Gordhan's budget speech next week should encourage businesses to invest
the record cash balances they have built up into the economy.
He hopes the budget will focus on creating a positive business and savings environment, and believes this is necessary to restore corporate confidence in the South African economy after the recent months of uncertainty and unrest.
“Our view has always been that locally based corporates have been steadily building cash piles as a result of a lack of confidence in South Africa due to political unrest and a troubled economic climate.
"Furthermore, banks have not been lending as freely lately and as a result companies have been holding onto cash reserves to cover themselves for any eventualities,” said Segar.
“It is crucial that the investment confidence of South African corporates is restored. A good budget speech will provide corporates with the confidence to spend their cash pile which could have a very powerful mobilising effect on the economy,” he said.
“The same applies to foreign investors who control vast sums of investment flows. Imagine the effect on the economy and job creation if South African corporates begin aggressively investing their R570bn cash at the same time as foreign investors increase their allocation to the country.
"A secondary benefit of inbound investment is the fact that it would result in a firmer currency and reduce the threat that inflation is posing to the economy,” he said.
The table below clearly highlights the inverse relationship between business confidence and non-financial corporate cash piles.
Segar says Gordhan should introduce creative incentives for companies to invest capital instead of holding it in cash, and should also create an environment that will encourage banks to lend again.
“We don’t want to see negative enforcement such as penalties for holding cash, but innovative incentive schemes - investment incentives could go a long way to stimulating much-needed economic investment.
“At current low interest rates even the best invested cash on corporate balance sheets creates a drag on earnings and return on equity," Segar said.
He considers it very likely that Gordhan will provide some clarity on the proposed national savings scheme and changes to the country’s retirement funding.
“There will definitely be a focus on encouraging savings and investment among all South Africans. The intentions of retirement reform and other proposed savings initiatives are very encouraging to us and we look forward to more clarity on the issue in this year’s budget address,” said Segar.
He also hopes the budget speech will address the issue of proper implementation.
“Government needs to ensure that the execution of the allocation of the budget as outlined next week is sound.
"We would like to see some direction in terms of accountability and responsibility of how the allocation of funds will be managed following the budget speech as this will also go a long way to restoring much-needed business confidence,” he said.
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