/ 26 August 2011

Sitting on a mountain of cash

Amid warnings of more global economic turmoil, South African corporate savings are at a multi-decade high, according to research by Stanlib.

The money corporate South Africa was sitting on at the end of 2010 was at its highest levels since 1995, reaching nearly 18% of gross domestic product, or roughly R479-billion. “Cash on hand has risen dramatically,” said Kevin Lings, chief economist at Stanlib.

This appears to mirror similar cases seen internationally, such as that of technology giant Apple, which has more cash than the United States government. Last month Apple was widely reported as having more than $76-billion in cash reserves, more than the US treasury’s $74-billion.

In the US companies currently have $2-trillion in cash on their balance sheets.

According to Lings, many businesses in South Africa cut costs in response to the global recession by cutting jobs, but many of those jobs have not been restored in spite of some modest economic growth. This has translated into good profit for many companies.

Other businesses chose to clean up their balance sheets, pay some dividends and then “literally put money into deposits”, in spite of relatively low interest rates, said Lings. The pattern was being followed by large corporates rather than small companies. The latter were “decimated” by the recession as they ran out of cash and then were unable to access finance to weather the storm. There is, however, no single answer to why companies were not deploying this money, he said; there are many reasons across various sectors.

Notably, the reasons include complaints about the difficulty of securing electricity supply for new operations, as well as the policy uncertainty generated by the nationalisation debate, Lings said.

Limited rail infrastructure and port capacity at locations such as Durban harbour also make businesses reluctant to expand.

Growing uncertainty
Changes to labour policy and legislation, as well as concerns about skills, continue to be bugbears for business. These problems exist in the context of growing global economic uncertainty and fear of further recession.

“Businesses are becoming short-term in focus, focusing on cost management, including labour,” he said.

A tipping point or catalyst that would spur companies to spend their cash in South Africa would be investment “unashamedly geared towards business rather than consumers”.

The Stanlib information comes on the heels of growing debate about whether economic growth and job creation should be state led or left in the hands of the private sector.

With the launch of government policies such as the new growth path and the related industrial policy action plan (Ipap2) the private sector has warned that increased state intervention in the economy may hamper development and deter investors.

Michael Spicer, the outgoing chief executive of Business Leadership South Africa, argued that it was simplistic to say that corporate South Africa is simply “sitting on a pot of money and not using it”.

“The broader debate keeps going back to structural issues, including the cost and supply of electricity and infrastructure bottlenecks. Those things are not being addressed,” he said.

Those issues, along with very hostile external global conditions, mean companies and entrepreneurs are simply seeing little or no opportunity to provide sustainable services to the market and get a fair return on their investment, Spicer said. Job creation and employment are an outcome of this process, he said, rather than the sole purpose for businesses to grow or expand.

Mark Swilling, professor of sustainable development at Stellenbosch University’s School of Public Leadership, argued that the hoarding of cash preceded current policy debates and is deeply rooted in the global financial and economic crisis.

He said the past 25 years had resulted in an addiction to easy profits derived from investment in paper and an aversion to higher-risk, messy investment in the complexities of real production.

‘The real economy’
“The collapse of Lehman Brothers in October 2008 was the most decisive moment in the collapse of a system that made it possible to make quick and high profits by investing in paper rather than in the ‘real economy’,” said Swilling.

He referred to the arguments of former British prime minister Gordon Brown and former World Bank chief economist Joseph Stiglitz that finance capital needs to “be disciplined so that investments in the real economy can once again be seen as profitable”.

“This means making a transition from the a global-casino economy driven by the pursuit of capital gains to a global economy driven by patient capital that is satisfied with dividends earned from long-term investments in the real economy,” Swilling said.

Although corporates support growth and job creation there is very little evidence that they have an appetite for risk and long-term returns, he said.

There is also little evidence that major investors are looking at investments that could break the stranglehold of the mineral-energy complex.

Swilling said that since 1994 the non-financial sectors that have experienced growth are related to mining and energy production, while non-financial, non-mineral and energy sectors have stagnated or declined.

“But these are exactly the sectors that are less capital intensive, create more jobs, are more dependent on innovation and better suited to patient capital looking for returns from dividends.”

To enable this, South Africa needs an “investment Codesa”, Swilling said. It needs to be supported by structured processes of engagement that put creativity and innovation at the centre of a new generation of industrial-strategy units that include universities, business, labour and government.