One thing South Africa must get right to unlock R1.5 trillion goldmine

South Africa needs to create confidence in the local economy to encourage corporates to invest the R1.5 trillion they have sitting in the bank.

Local corporates are among the most conservatively run in the world due to the country’s stagnant economy and elevated policy uncertainty. 

These factors push them to keep additional cash in the bank, either as a buffer against potential shocks or as a war chest to invest heavily when the tide turns. 

This is feedback from Stanlib chief economist Kevin Lings, who outlined why local companies sit on large amounts of cash and what needs to be done to encourage them to invest in the economy. 

“I think we have a long history where corporates in South Africa tend not to want to put any of their cash at risk. They regard cash as a necessity, a backstop they need to have in place from a comfort and security perspective,” Lings said. 

“And with a low level of confidence, corporates are watching their costs closely, keeping investments limited, and keeping cash handy to take advantage of opportunities when they arise.” 

“The strange thing is that this level of cash has been building up over a long period of time, and so it is telling me that companies are not drawing down on that cash in any significant way.” 

Lings said this is driven largely by medium-sized and large companies, with big corporates making up the bulk of the cash reserves held in the country. 

There has been some investment from corporates in South Africa, but this is largely in the form of subsistence investing, as businesses invest to keep their doors open. 

This investment is limited to alternative energy supplies, backup water supply, and security, with very little invested in growing the business and employing more people. 

“We would have to up the investment considerably more to result in capacity building or job creation in South Africa,” Lings said. 

“The current investment level is mainly maintenance capex and kind of treading water, with companies waiting for a better environment.” 

“Instead of deploying capital into growth or hiring, corporates are parking it in money market funds or call accounts.” 

Crisis of confidence

Lings explained that the main factor preventing more significant private sector investment in the local economy is a lack of confidence. 

Elevated policy uncertainty and an unstable political environment have continued to knock business and investor confidence in South Africa. 

Coupled with a stagnant local economy, which has grown at an average annual rate of 0.8% for the past decade, businesses are unwilling to invest in the local economy. 

“So generally it is a confidence thing. Confidence is a leading indicator of increased investment. Without it, funds do not flow into the local economy,” Lings said. 

“We find around the world that in order to inspire more private sector investment, you must first get the confidence.” 

Without confidence in the local economy and political environment, companies are unwilling to undertake long-term investment decisions. 

“Companies undertake a certain level of investment that is maintenance and, to a large extent, that can happen irrespective of the level of confidence,” Lings said. 

“This is the case in South Africa. Companies are investing to keep their machinery functioning and business operating, not growing.”

“This is an investment you simply have to undertake in line with renewal or maintenance cycles. It is kind of business-as-usual capex.” 

This investment is insufficient to grow the local economy meaningfully and for companies to begin creating jobs. 

“What we really need in South Africa is what we call expansion capex, and that tends to be a function of confidence,” Lings said. 

“This type of capital is unlikely to suddenly and miraculously materialise overnight, despite trillions sitting in cash.” 

“You have to have policies in place that are going to lead to that outcome. Our view is that the best way to start that is through public-private partnerships.” 

These partnerships draw in some of this cash and some of the investments and get the process going. Crucially, this can ignite economic growth.

“Once you start to get some investment, then you tend to get a virtuous cycle where others are willing to follow, and that begins to unlock substantial capex,” Lings said. 

“The initiation of the process is the most important thing. Once you start investing, lift the growth rate, then there is a tendency for it to become self-reinforcing.”