Johannesburg – The corporate sector in South Africa is hamstrung by uncertainty over political and economic policy, which is keeping it from making sorely-needed investments that would allow the economy to change into higher gear.
This is evident from the R522bn stack of cash that companies were holding in bank deposits at the end of April. The figure is 11% more than it was in April last year, but at least below December’s R540bn.
Companies in almost every sector of the economy, including property, financial services, manufacturing and construction, are hoarding cash rather than investing it productively.
The exception is in the retail sector, where expansion and investments continue.
South African companies have previously sat with large amounts of cash on their balance sheets, but for the first time the dominant reasons are obscure policy directions and political uncertainty.
Uncertainty about the global economy also contributes to companies’ inertia in taking long-term decisions.
During the past week Dr Johan van Zyl, Sanlam’s chief executive and the chairperson of the Association of Savings and Investment (Asisa), in his inaugural address at the annual Asisa conference said that South Africans and foreigners would remain on the sidelines with their capital until there was certainty about how it could be applied.
Ajen Sita, chief executive for Africa at Ernst & Young, said there are especially questions about the direction government will take in the next six months, with the ANC policy conference coming this week and the ANC electoral congress in December ahead of next year’s general election.
Companies, he said, strive for a good return on their investments and to that end clear policy directions and political certainty are required. In the absence of those, they prefer to hold onto their cash.
Konrad Reuss, managing director at credit rating agency Standard & Poor’s for Africa South of the Sahara, said companies’ cash balances won’t reduce much over the next 12 months.
“With everything on the political and economic agenda, there is little incentive within the next 12 months for companies to take investment decisions with long-term impacts on their operations.”
Sita said the foundation of every democratic state is a general election every four years, but it is economically unhealthy for it to be accompanied each time by uncertainty over policy directions.
Even if there are changes to the political leadership corps and even to government, there has to be certainty over long-term policy directions, otherwise the corporate sector becomes paralysed by uncertainty every four years.
He considers the new growth plan to be a step in the right direction, but it needs to be broken down into smaller projects for investment.
Investment Solutions economist Chris Hart said two examples of where good policy intentions went awry are the empowerment charter for the mining sector and land reform.
He says the mining sector began to stagnate in 2001 when the sector’s charter was published, whereas expansion is key to achieving the charter’s commendable aims.
In the same way the uncertainty and the amended objectives of land reform have resulted in South Africa now being a net importer of food instead of attracting greater investment and expanding the sector.
“Attempts to solve economic issues aggravate the problems because of uncertainty about the objectives, which contributes further to the problems.”
The reluctance of South African companies to invest within the country is hampering economic growth and job creation, which are in turn required to create the economic demand that will stimulate investment.
For this, said Reuss, a balance between demand and supply is needed. On the one hand companies say increasing demand will stimulate investment, but unemployment is high and those consumers who do earn an income are under financial pressure.
Economic growth is furthermore impeded because South Africa does not attract the amount of foreign fixed investment that might be expected in current conditions.
Growth in Europe and the US has more or less come to a halt and investment funds are flowing to emerging countries. But South Africa is not getting its share because the economy is not productive enough.
Sita said greater investment in the domestic economy – not only in manufacturing and in consumer goods – is necessary to create jobs as well as an attractive investment destination for foreigners.
South African companies are not unwilling to invest their money elsewhere. Retailers and financial institutions are expanding to other parts of Africa despite the inherent risks.
Hart said the economy is being hamstrung by an imbalance between the savings rates of companies and individuals.
Even if the corporate sector invested all its money, that would not suffice to solve the unemployment problem. Work is created not by the corporate sector but by households, who don’t have billions in savings, he said.
A lot of cash on the balance sheet is not always a bad thing.
In the past there have been long periods in which South African companies had large amounts of cash on their balance sheets. This was not necessarily always a bad thing.
Investment Solutions economist Chris Hart said that during the debt standstill of the 1980s, the Asian crisis of the 1990s and the collapse in the value of the rand in 2001 the cash on corporate balance sheets in South Africa was South Africa’s salvation.
In 2008, when the financial crisis flared up, South African companies were again protected by their “conservative” approach to investments.
The fact that South African companies are healthy is also reflected by movements on the JSE. The South African stock market recently recorded all-time highs and is 40% higher than it was in 2008.
The French stock market is 50% down, that of Spain 60% down and Greece 90%. In Germany movements have been at best sideways.
Konrad Reuss, Standard & Poor’s managing director for Africa, said in rating terms the creditworthiness of South African companies is a plus point – they are not exposed to excessive debt.
Company cash deposits are moreover a good source of finance for the banks. Banks in turn use these deposits to make loans available.
Reuss said if companies should resume investing on a grand scale, banks will have to scramble to find other sources of finance.
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