South Africa sitting on a R1.5 trillion goldmine

South African companies are sitting on R1.5 trillion in cash that remains undeployed in the local economy, with their debt levels plunging to a 19-year low. 

This pool of capital presents a significant opportunity for the country to boost its economic growth if these companies can be encouraged to invest some of their cash in the local economy. 

With it making up 20% as a share of GDP, questions are increasingly being asked about why this cash is kept on the sidelines. 

Stanlib chief economist Kevin Lings said one of the main reasons is that elevated interest rates make money market funds highly attractive compared to other investments. 

“Right now, money market funds are yielding around 7.5% nominal. That is an attractive yield compared to traditional call accounts and also riskier investments,” Lings said. 

“The Reserve Bank is keeping interest rates elevated to maintain South Africa’s low inflation, and this might not be good for economic growth, but it is great if you are invested in a money market fund.” 

The other factors driving this behaviour are the lack of investment opportunities in South Africa’s stagnant economy and the elevated risk of investing locally. 

“Corporate cash has grown considerably in South Africa and has been doing so for a number of years. It is now sitting at just below R1.5 trillion, which is 20% of South Africa’s GDP. It is a huge amount,” Lings said. 

Corporate cash on hand has been growing at around 12% per annum for the past few years, despite the country’s economy growing at less than 1% annually. 

“This is telling you a couple of things. Corporates are generating good earnings and managing to keep costs under control,” Lings said.

“But, it also shows that they clearly do not want to deploy that cash in terms of fixed investment, in terms of expanding their business, or in investing in the local economy. There is very little of that happening.”

This is a major handbrake on South Africa’s economic growth, with fixed investment being important in expanding economic activity over the long term and enhancing productivity. 

“It also shows that business confidence is fairly depressed. With a low level of confidence, companies are simply watching costs, curtailing investment, and building up cash that sits in bank accounts,” Lings said. 

Ultraconservatism

Some of these corporations are still investing in the economy, but instead of allocating money towards growing their businesses, they prefer to invest in keeping their doors open. 

Referred to as ‘subsistence investing’, this kind of investment is in alternative energy sources and backup water supply to mitigate against declining service delivery from the state. 

However, Lings also said that companies are showing signs of being ultraconservative with their buildup of significant cash reserves. 

“When I look at it from an economic perspective, this is ultraconservatism. Looking around the world, South Africa stands out as being especially conservative in how it manages its corporate balance sheet,” Lings said. 

“That is both a positive and a negative. The negative component is that companies could be doing a lot more in terms of generating additional returns for themselves with minimal increase in risk.” 

The cash South African companies are sitting on lends itself towards a negative outlook for the local economy, with businesses lacking the confidence to invest. 

“South African corporates are taking on very little investment, and they are sitting on significant cash reserves. All of this is a byproduct of lacking confidence in the future performance of the South African economy,” Lings said. 

“This is not a great environment if you are looking at it through an economics lens, or a growth point of view, or an employment point of view.” 

However, Lings said the benefit is that capital can be moved fairly quickly if opportunities arise to drive investment and economic growth significantly higher. 

Many of these companies are adopting a wait-and-see approach, as they want data indicating that the South African economy is picking up pace and will deliver enhanced growth in the future. 

Some will also be put off by geopolitical uncertainty and local political volatility, which exacerbates the wait-and-see approach of some.