South Africa unlocking R1.2 trillion goldmine

South African companies have been extremely cautious when investing in their local operations. Low growth and policy uncertainty inhibited long-term investments in expanded capacity or new businesses. 

This has resulted in these corporates having over R1 trillion in idle cash sitting on their balance sheets, earning interest from money market investments rather than being invested in growing the local economy. 

The government is now looking to implement reforms to unlock this goldmine that could significantly boost economic growth if invested in productive assets. 

Stanlib chief economist Kevin Lings explained in a research piece that there are many reasons for South Africa’s relatively low level of corporate debt and investment. 

Chief among these are a sustained low level of business confidence, a dearth of fixed investment in the private sector, and conservative financial management. 

While this has been unhelpful from an economic growth perspective, it highlights the need to encourage private-sector fixed investment and the expansion of capital stock and employment within all economic sectors. 

Lings said this is very unlikely to happen in isolation and in the absence of sustained higher economic growth.  

This means that South Africa needs to first focus on the increased use of private-public partnerships to develop key economic infrastructure. 

If successful, this would lift economic growth, employment, and business confidence, allowing for the systematic unlocking of the corporate balance sheet, which has the potential to become self-reinforcing. 

The South African non-financial corporate sector has been extremely conservative over the past ten years, reducing its debt-to-GDP ratio from 34.9% to 32.2% in mid-2024. 

This includes the debt owed by South Africa’s state-owned enterprises (SOEs), such as Eskom and Transnet, reflecting just how conservative private companies have been. 

In comparison, non-financial corporate sector debt amongst emerging markets currently averages 93.5% of GDP. Even if you use an equal-weighted average, the ratio is still well above South Africa’s at 61.5% of GDP. 

Furthermore, within developed economies, corporate debt (non-financial) is currently up at 88.9% of GDP, which means that out of 62 emerging and developed economies, South Africa’s corporate sector is one of the least indebted in the world.

Research from Old Mutual Wealth’s Cash and Liquidity unit shows that SA non-financial corporate deposits have grown by more than 9% this year to over R1.2 trillion in 2024.

This cash pile is only likely to grow in the near future, with the Reserve Bank’s data showing that companies increased their savings dramatically in the first half of 2024. 

While some may be critical of this approach given their own economic ideology, South Africa is in this position due to the gross mismanagement of the public sector balance sheet. 

This mismanagement has dramatically narrowed South Africa’s policy options and seemingly backed the government into a corner, forcing it to turn to the private sector. 

Many countries that have increased their debt over the past ten years have been able to use those funds to develop the economy and sustainably increase economic activity. 

South Africa’s public sector has not done that, and much of its increased government spending over the past decade has been unproductive. 

The result is a massive increase in debt that has been accompanied by a substantial slowdown in economic activity and a pronounced deterioration of South Africa’s international credit rating. 

In these circumstances, it would be unwise for the South African government to increase its debt further without first fully repairing the state’s institutional capacity. 

Lings also said there would need to be a sustained expansion of the tax base through a steady increase in employment. Economic policy needs to focus heavily on encouraging the private sector to invest and employ.

South Africa’s household debt was measured at a manageable 34.2% of GDP in the middle of 2024. This is down from 38.9% of GDP ten years ago and below the average for emerging markets of 47% of GDP. 

However, given South Africa’s extremely high unemployment, at 32.1% towards the end of 2024, it would be unwise to try and meaningfully leverage the household sector balance sheet to boost economic activity.

The only way this could be done is a significant increase in formal sector employment. A surge in household debt without a commensurate increase in employment would likely lead to an increase in bad debts and unwanted pressure on banks.