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Johannesburg – Contrary to anti-business rhetoric doing the rounds, businesses are not withholding money from the economy, according to Nedbank chief executive Mike Brown.
He was speaking at the Nedgroup Investments Summit in Sandton on Tuesday. Brown shared on the role of businesses and banks in securing the future of South Africa.
He explained businesses are facing a challenging environment, having to grapple with distrust from society while dealing with changes and opportunities of the future.
“In many debates, business is blamed for the lack of growth,” said Brown. This is correctly placed as businesses account for 75% of the economy which is not growing. The private sector is also responsible for 70% of jobs, and indirectly 30% of jobs in the public sector through taxes paid to government, he explained. The private sector also accounts for 60% of capital formation or investment in the economy.
“The economy can’t grow and can’t create jobs unless businesses grow and businesses create jobs,” he said.
Brown said it is important for businesses to consider what level of economic growth is possible in the midst of a political crisis. “Government is not just at war with the opposition parties, but also with itself,” he said.
Investment strike
There are views that businesses are on an investment strike, sitting on piles of cash which are not being distributed in the economy. But Brown debunked these myths with data extending from the 1960s.
Since the 1980s investment has been consistent, ranging between 10% and 17% of GDP. This is an average of 12.8% over the period. During 2016 the level of investment was at 12%, high given the recessionary conditions and political and policy uncertainty.
Public sector investment has ranged between 3.7% and 18.5% of GDP. This is at an average of 9%. In 2016, public sector investment was at 7.6%, low despite the large-scale energy and transport projects under way.
Looking at cash on corporate balance sheets, cash as a percentage of GDP has been relatively flat since 2008/09, said Brown. In the past eight years, businesses have been net borrowers, and not “net sitters” as has been implied.
“This makes sense, no business is incentivised by shareholders to sit on cash and earn returns lower than the cost of equity.” Given the political environment, businesses are reluctant to invest. But the cash is still making its way into the economy through the banking system.
“Banks and asset managers are using that cash exactly as they are supposed to do - taking that cash as banks and translating that back into other assets in the economy. Asset managers are doing exactly the same.”
A large portion of the cash is being used to buy government bonds, and in effect financing the fiscal deficit, explained Brown.
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