Here’s a rapidly growing export industry the country could well do without: dividends.
South Africa paid out a massive R203-billion in dividends last year. Although oil is our largest import and is widely seen to be the biggest drain on the country’s current account, the oil import bill last year was a relatively modest R76-billion.
Dividend payments in the first two quarters of this year have so far totalled R120-billion.
Economic growth has attracted foreign investors to the JSE and seen the country’s current account deficit balloon from -2% of GDP in 2003 to -7% in September, according to the Reserve Bank. Prudent levels for a current account deficit should be no more than 3%, economists say.
The huge outflows of dividends since 2007 show that the flow of foreign money into South Africa has come back to bite our economy.
Dividend outflows from South Africa form the largest contributor to South Africa’s deepening current account deficit, says Stanlib economist Kevin Lings.
During the final quarter of 2007 net dividend outflows reached R85-billion, more than 4% of GDP.
The deficit on the trade account stood at R9,79-billion in October, as the country continues to import way more than it exports. South Africa has been soaking up foreign oil, machinery and equipment, resulting in our widening trade deficit.
Running a current account deficit has been necessary to boost growth and create jobs. To finance this growth South Africa has worked to attract foreign capital, often taking the form of investment in local equities. Dividend outflows are the ”negative side of foreign investment”, says Lings.
But as the global economy flounders these outflows could decrease along with local consumption.
Lings says between 2004 and 2007 foreign investors became increasingly interested in South Africa as an emerging market investment destination. This resulted in some 25% of the JSE ending up in foreign hands in those years. During the same period foreigners invested about R220-billion into the JSE. Companies reported excellent profits and paid out hefty dividends.
With the financial crisis, foreigners have sold off a large amount of local equities — around R55-billion during the year to date.
But when foreigners sell their South African equities, fewer dividend payments leave South Africa for international shores, Lings says.
And as company performance is affected businesses are cutting dividends to shareholders or not declaring them at all. As a result dividend outflows have recently shrunk to just under R55-billion.
”This is the largest portion of our current account at the moment, so [the current account deficit] could improve as these numbers improve,” says Lings.
Christopher Loewald, deputy director general at the national treasury, says the deficit is not in essence a bad thing: ”High growth rates have been associated with a high current account deficit and we’ve been comfortable with that because we could finance it.”
While the current account deficit may shrink as foreign dividend outflows decrease further, it is also a sign of slow growth both locally and internationally, which Loewald says is of concern.
According to Lings the trade deficit is worse in the second half of the year as businesses build up inventories for the festive season. But because of the slowdown in the local economy there may be a softening of inventory build-up and an improvement in the trade deficit.
Lings says the outlook for the services account may further improve, as a weaker rand could see tourism pick up. Foreigners will be enticed to visit South Africa while locals are less likely to travel this festive season, saving more.
Nevertheless fast-moving foreign capital can be a double-edged sword, working for us when times are good, but not when they get tough. So how should South Africa decrease its need for this type of investment?
Economist Mike Schussler argues that to do this South Africa must produce and export more, while importing and consuming less. Lings says that another option is to improve foreign direct investment. This means encouraging foreign nationals to bring capital into the country and create businesses. However, crime, land restitution and labour policy are of concern to investors, whether local or foreign, and contribute to slowing private sector investment.
Economic management in South Africa is largely left to the treasury and the reserve bank, but these are challenges that cannot be controlled directly through these arms of the state argues Lings. Other government departments need to be involved in economic development, he argues.
