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Jimmy Moyaha: We’re looking at some very interesting insights that suggest that non-financial companies within South Africa are sitting on a mountain of money, R1.4 trillion to be exact. I decided to join Stanlib’s chief economist, Kevin Rings, on the phone to take a look at this and see if it made sense.
Good evening, Kevin. I’m happy to have you appear on the program. Why do companies have so much money?
Kevin Rings: As you say, corporate cash stands at R1.4 trillion, just over R1.4 trillion. In fact, this is the highest record ever.
What’s been happening is that even though the economy has been very weak and we haven’t had really strong economic growth, companies have been quite conservative in the way they approach things like fixed investment and the way they approach their cost base.
Many companies are engaged in the process of reducing costs, some of which can be as simple as reducing travel and reducing meetings. But perhaps it will cover a wider range of items. And through that process, they’ve strengthened their balance sheet, and their balance sheet is actually in very good shape.
One of the consequences of a strong balance sheet is simply the accumulation of significant cash.
We only focus on South African companies because most of the cash currently ends up in deposits in South African banks.
This calculation does not include foreign companies. It also does not include whether local companies have funds offshore. That’s another story.
This is just South African companies depositing money in South African banks, which is an all-time high at R1.4 trillion.
This reflects the conservative nature of the current South African corporate environment, their desire to protect their balance sheets and ensure they are healthy and not vulnerable to any economic downturn.
At the same time, they were able to manage their debt well. If you look at our debt levels compared to other emerging markets, it’s literally one of the lowest in the world.
So you’re looking at a corporate sector that has been able to manage debt well, keep debt under control and accumulate cash. Therefore, the balance sheet is strong.
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This is clearly highlighted in the South African context as the government has the opposite problem and indeed the household sector as well.
The household sector is not in very good shape in terms of debt and cash levels. So from a balance sheet perspective, the corporate sector is the strength of South Africa’s economy.
Jimmy Moyaha: That’s a very interesting insight, Kevin, I want to look at the spending side. We’ll talk about that in a moment.
But I would probably start by looking at, as you said, the importance of national balance sheets and companies being on the good side of national balance sheets, so to speak. I would like to look at the importance of this from the perspective of building the economy. We’ve been trying to reignite our economy for a long time. It has become stagnant. Please briefly explain the role of these types of numbers in building the economy.
Kevin Rings: That’s absolutely important. Because at some point in the economy the government will say clearly no, the government has to rebuild the economy, the government has to drive growth rates. Sometimes that works. Not that it’s not a solution.
Looking back at South Africa’s history, as of 2008/9 South Africa’s government debt was 26% of GDP. That’s incredibly low.
In other words, in 2008, the South African government could legally say that since it could afford to take on debt, it should promote economic growth. They had room to expand and build infrastructure.
From 2008 to the present, government debt has reached 76% of GDP.
It is clear from the budget and various other figures that the government is really struggling to service its debt in terms of interest costs.
So even if you go to the government now and say, government, we’ve got to drive this growth, we’ve got to build the infrastructure, we’ve got to revitalize our water and rail and ports, we don’t have the money to do that, we don’t have the balance sheets to do it. But this country still needs those goods.
So all you have to do is look around and see if anyone has money. Is there a balance sheet available? That turns out to be a yes.
Since corporate balance sheets are in such good shape, the obvious solution is to find ways to leverage them. This is to free up its balance sheet to promote South Africa’s growth.
From there, it’s easy to say, “Let’s do public-private partnerships,” or “Let’s get the corporate sector involved with government in building infrastructure.”
And yes, does it work? absolutely. Is the corporate sector interested? Yes. Are there any examples of that being successful? Yes.
In the energy sector, the corporate sector has built almost 12,000 megawatts of solar energy.
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The answer, therefore, is to find ways to align private sector balance sheets with government initiatives and leverage the private sector to facilitate rail development, port development, and all other outstanding infrastructure.
We know that the corporate sector is very interested in this, as long as the project is solid, well managed, free from corruption and set up to achieve its planned objectives.
Now, if you do that all of a sudden, you have a huge pool of money that you can pour into growing this economy.
Once you start doing that, for example, when you start unlocking port capacity, rail capacity and other infrastructure, the private sector will broadly look at that infrastructure development and say there’s an opportunity. We are going to build a shopping center near here because this infrastructure is better. Considering this developed infrastructure, we intend to expand our distribution network. The private sector will then develop based on this.
But we need something to stimulate the economy. There are many things that are holding us back, but the one that is holding us back the most right now is the lack of critical infrastructure.
The private sector has a balance sheet, an answer. Government and the private sector can then form partnerships to develop South Africa’s infrastructure. And I don’t see why it can’t be achieved, given that we’re already doing that in the energy sector.
Jimmy Moyaha: So, Kevin, how do you facilitate this? How do you reassure the private sector that the public-private partnership is on track and will bear fruit? How do we address concerns that may be out there, such as corporate trust and policy concerns? How do we facilitate the process?
Kevin Rings: Efforts are already underway to do this. This is by no means a unique or new idea. This has been around for a while. But clearly it’s having a hard time gaining much traction, and it’s having a hard time actually moving the economy forward.
If you look at where those bottlenecks are, a lot of them simply have to do with the political will to implement the policy changes that make this possible.
Transnet is a very good example. There is a growing recognition that coal railways, iron ore railways, manganese railways, etc. should ideally be operated by the private sector. Private companies want that. The private sector wants to operate those rail lines.
The government has said it will allow the private sector to do so, but not to own the railway lines, and the private sector has given it full acceptance. They just want to run the trains, so the lines can run more efficiently.
That process is underway, but lo and behold, it’s a tedious and drawn-out process that is struggling to gain enough momentum.
That’s what you have to get to to get to the point where you say, “Okay, here we are putting it out to bid, asking the private sector to bid to operate the manganese rail line.”
Now, obviously, when you put it out to bid, the (parameters of) that bid has to be acceptable to private sector funding.
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This is conservative money sitting in the bank at the moment. I don’t want to take too many risks. They want to know that their funds will be used appropriately.
So, naturally, the private sector is going to be demanding quite a few answers to questions like how this project will be managed, how the parameters will be set, and so on. What obligations does the government have to deliver on its promises? It also needs to have all of them in place.
All of this results in delayed or lengthy processes if necessary.
But I’m sure it’s underway and will move further in that direction over time.
I think the difficult thing is that you really don’t have the time. We really hope this economy gets better soon.
So what we need is a greater sense of urgency to make these private partnerships happen and to make them happen, not just within our rail systems and our port systems, but also our water systems, our sanitation systems, and all the infrastructure that is failing.
And the private sector is fully committed to this.
I work for a company called Stanlib, where we manage funds and invest in infrastructure. Ask, “What is your biggest obstacle?” It’s not the availability of capital.
The stumbling block is the availability of suitable projects.
And if the project is well represented and there is an investment target, the funds will become available.
Jimmy Moyaha: In the immortal words of the Black Eyed Peas, “We’ll meet you halfway, and together we can do it.”
I’ll stop talking about that, Kevin. Thank you very much for your valuable opinion and time.
Stanlib Chief Economist Kevin Rings joins us to explore the R1.4 trillion that the private sector has set aside, ready and waiting to be deployed.
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