Fin24

SA corporates hoard cash - expert

2012-11-07 13:41

Cape Town - Reserve Bank figures show record cash balances are being held by the private non-financial corporate sector. Recent political and economic instability has undoubtedly played a role in this cash buildup.

However, with historically low interest rates and corporate balances in South Africa increasing, it is crucial for companies to ensure that they utilise their cash balances effectively by selecting the investment vehicle best suited to their individual profile.

This is according to Ian Ferguson, head of cash solutions at Nedgroup Investments, who believes corporate cash piling is counter-intuitive considering that interest rates are wallowing at near 40-year lows.

“An astounding R549bn was sitting on the balance sheets of such corporates at the end of August 2012, representing an increase of 14% over the last year – double the growth rate of overall deposits,” he said.

Ferguson, speaking at a Nedgroup Investments media roundtable held in Sandton on Wednesday, said corporate cash piling is not unique to South Africa, although the reasons for the cash buildup in South Africa differ from those offshore and companies need to consider their options within the local context.

“The decision by South African corporates to build their cash to such levels appears to be driven by a number of factors - including delayed investment in projects and expansions.

"Political instability, unclear policies and labour unrest have all contributed to an uncertain environment for business which has made planning and forecasting difficult for corporates,” he said.

The fact that banks are not lending as freely as they did in the past has also meant that corporates need to shore up their balance sheets and alter capital structures which will in future involve lower levels of debt funding, or alternative sources of funding.

“The implementation of Basel III will most certainly result in higher interest rates being charged by banks who will be required to hold higher levels of capital, the cost of which will have to be passed on to borrowers in the form of higher interest rates,” said Ferguson.

However, despite such a large increase in deposits, statistics released by the Association for Saving and Investments South Africa (Asisa) show that  the size of  money market funds have declined by 8% over the last year.

Ferguson said the prevailing lower yields have forced investors to migrate into more aggressive income funds and Domestic Asset Allocation funds, which now make up the largest segment (31.5%) of the unit trust industry.

“The decrease can also be attributed to the elimination of dividend income funds. Furthermore, money markets have been used extensively as collateral for securities lending in the past.

"There has been a clear drop in the volume of securities lending taking place as a direct result of the financial crisis, and those traders who are still active in this space are now making use of alternative collateral, with a definite move towards equity,” he said.

Meanwhile, Asisa statistics show that although domestic money market funds have been experiencing net outflows since the start of 2011, they enjoyed a net inflow of R10.8bn in the third quarter of 2012, caused by a handful of corporate and institutional investors parking money to better utilise large cash reserves.

“The corporate sector continues to make good use of money market funds which deliver higher yields than call accounts and offer the same access to funds without incurring additional risk,” said Ferguson.

According to Ferguson, there has also been a noticeable rise in the use of low risk income funds by those corporates that are able to forecast cash flows and do not require same-day access to funds.

“Treasurers are embracing the additional 0.5% that can be earned in such funds which have similar credit risk to money market funds, but require a day’s notice in order to access funds,” he said.


 

Comments
  • simon.stamp.98 - 2012-11-07 13:59

    It is in directors of Companies their 'blood' to invest and expand. If they have the money available and still don't do that, I suppose there will be a very good reason for that!!

      andrez.kolesky - 2012-11-07 14:40

      A very good one at that ...

  • philjoubert - 2012-11-07 15:01

    Did anyone else go \duh\ when reading this headline.\r\n\r\nImagine my shock and horror that companies see their sole purpose as making money in the largest, most efficient way. Imagine that!

  • theMichaelHawthorne - 2012-11-07 15:19

    There is enough to go around twice... yet we are forced to suffer at the rules of the man made monetary system.

      mike.lindsay.7927 - 2012-11-07 17:11

      And the monetary system which isn't man-made is .......... ?

  • Blixum - 2012-11-07 18:20

    Can you imagine what will happen to the economy if all that money gets released and re-invested in the macro-economy?

      wdvilliers - 2012-11-07 19:24

      Well said

      Tshepo Gwamanda - 2012-11-08 06:24

      The economy will expand, there will be more jobs created, there will be more businesses existing as a result a bigger tax revenue for our government which means more service delivery to our people! and the economy continues to grow and everybody is happy! South Africa moves to become a developed economy rather than developing! is this hard to imagine!!!?

  • Tshepo Gwamanda - 2012-11-08 06:18

    This is concerning, i'm an MBA student and they don't teach us this at business schools! The sole purpose for business executives is to realise shareholder value, this is done through acquisitions and mergers or expansions the skill of growing the business. Holding too much cash in the business account is bad for business because you are not capitalising on what we call 'opportunity costs' these are bad executives. i would be bold and call this practice unethical! They don't teach us this at business schools. Are these business executives expecting this country to collapse!!!? then they can move their cash out of the country!! this is the only thing i can think of as a probable cause! either way its concerning.

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