The myth that South African companies are hoarding cash that could be used for investment has lately been busted by two careful pieces of research showcased on the pages of this newspaper.
In the first, Business Day columnist and Rhodes University economics professor Gavin Keeton refuted the notion that companies are sitting on large deposits of "idle cash", arguing that bank deposits are never "idle". The nature of banking is such that if corporate deposits rise on the one side of banks’ balance sheets, households and firms must be borrowing on the other side.
Therefore, Keeton wrote, the rise in bank deposits over the past couple of decades was because companies (and households) borrowed — not because they retained profits. There are companies with large amounts of cash on their balance sheets, but Keeton cites research to show that much of the R1.3-trillion of cash on the balance sheets of the largest 50 companies belongs to international companies such as Richemont and BHP and a further chunk belongs to banks as part of their liquid-asset requirements.
The second piece of research, from our columnist Stuart Theobald’s Intellidex, finds that there is a range of factors explaining the 11% real increase (adjusting for inflation) in the cash holdings of 85 top JSE-listed companies over the past five years. Those companies have in fact been investing throughout the period, not hoarding cash as some would have it.
A great deal of cash is held to replace plant and equipment as it reaches the end of its useful life. The Intellidex research makes the simple point that sitting on cash in the bank is a very poor investment because the return on deposits is so low. Companies would generally not choose to do that if they could invest in something with better returns.
The takeaway ... is that large corporate cash holdings are not the same as an ‘investment strike’
In line with Keeton’s argument, the Intellidex study shows South African firms have become more indebted and their balance sheets more risky over the period in which cash holdings have risen. There are reasons to hold more cash relative to assets, says Intellidex, especially when the economy is doing poorly and caution is warranted. As economic growth has slowed in the past four years, companies’ cash-to-assets ratio has risen.
But the takeaway from both studies is that large corporate cash holdings are not the same as an "investment strike". That makes intuitive sense anyway, if you look at it the other way around: if companies with sound balance sheets see good investment opportunities, they can finance this with debt or equity if they need to; whether or not they have cash in the bank has little to do with it.
But that is really the problem in SA. Companies will struggle to see good investment opportunities in a weak and uncertain economic growth outlook and a policy environment that is uncertain at best and antibusiness at worst.
Company managements are spending shareholders’ money, much of it ultimately the money of pension and provident fund members. Those shareholders will not and should not let the companies in which they hold shares make investments just for the sake of it. The investment case needs to be there, over the long-term — and in SA right now, it is often hard to make that case.
Reserve Bank figures last week showed private-sector investment spending was declining at 7% in real terms in the latest quarter and has been negative in more quarters lately than it has been positive.
The decline in investment spending has dire implications for the economy’s potential to grow in future years. Politicians and policy makers need to look to the real underlying reasons for investment falling, instead of placing spurious blame on the amount of cash in the bank.