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Are SA companies sitting on piles of cash?

Omigsa economist disputes argument that corporates hold 41% of GDP and are reluctant to invest.

JOHANNESBURG: South African companies have been criticised that they are reluctant to invest in the economy of the country, based on a perception that these companies are sitting on piles of cash. According to research done by Rian le Roux, chief economist at Old Mutual Investment Group South Africa (Omigsa), this perception might not actually be true and therefore an argument that companies have lacklustre appetite for contributing to the economy may be unfounded.

Le Roux examined South African Reserve Bank deposit data as at November 2012 and showed that, rather than the total R1.34trn held as bank deposits by non-financial companies that is often used, ‘true’ non-financial corporate deposits were only R578bn. He said that the remaining R762bn of deposits had to be left out of the equation, as these were mainly deposits held with banks by fund managers and unit trusts and were thus not readily available to invest by specific companies.

“This Reserve Bank data has been the source of much public debate and speculation,” said Le Roux. “It has been used to support a wide variety of claims from many different sources. The most common interpretation is that this ‘cash pile’ is evidence of the private sector’s ‘unwillingness to invest in the economy’, but other arguments have also been forwarded in the past, including that money was being hoarded in anticipation of offshore (rather than local) investments, or for large-scale investment once the business climate improves, or even for special dividend pay-outs,” Le Roux said.

Le Roux therefore believes that the true numbers do not actually say much, if anything, about large South African companies’ willingness to invest or not. He estimates that cash held by corporates is only around 18% of GDP, instead of the 41% of GDP commonly quoted.

Just yesterday (Monday) Grant Thornton released its International Business Report on Mergers and Acquisitions for 2013, stating that South African businesses and their global counterparts, are sitting on large cash piles in these uncertain times.

“South African businesses are waiting to see when the economy will turn, when the Eurozone crisis will be abated and – on a local level – companies are also waiting for stability once the 2014 South African national elections are complete,” Steven Kilfoil, corporate finance director at Grant Thornton Johannesburg, said in a statement.

Le Roux said his research only shows that more research needs to be done and that the data on corporate deposits does not actually say much at all about the appetite of South African companies to invest in the economy. He also looked at data from company results as of the end of 2012 and said that cash on corporate balance sheets of the 40 or so largest non-financial, non-dual listed companies on the JSE only totalled about R200bn – which is closer to 5.5% of GDP. The remainder of available cash is therefore held by hundreds of thousands of medium and small companies. 

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