For years now, business has been accused of waging an “investment strike” and hoarding its cash, a claim often repeated by political campaigners and commentators. The idea that corporate South Africa is stuffing its mattresses and refusing to invest in our country has been taken up most recently by “Paid Twitter” to distract from the real anti-patriots: those intent on capturing the state.
Given the damage these repeated claims can cause, there was an urgent need to test them.
So Business Leadership South Africa commissioned independent research from Intellidex to look dispassionately at the country’s largest mining and industrial companies – the most capital-intensive ones – and assess their appetite for investment.
Intellidex looked at their cash-to-assets ratio, which allows us to gauge whether their cash holdings have outpaced the growth in their over-all balance sheets, and found that, when factors such as inflation and the exchange rate were taken into account, the relative level of cash as a proportion of companies’ assets has remained nearly constant over the past decade. During the period of the study, the rand has been depreciating by approximately 8% a year. As the top 10 companies are multinationals, which generate the bulk of their income outside South Africa, it is likely that the cash they hold is in hard currency, so the amount on their balance sheets only increased in rand terms.
The study also showed that, as growth ebbs – as it has in South Africa – companies retain more cash to ride out difficult conditions. Businesses are more cautious in times of financial uncertainty, as the owners of their companies (the shareholders, pensioners and foreign investors) would expect them to be. The evidence for cash hoarding simply doesn’t exist.
The same is true for the so-called investment strike. The companies’ cash-to-capital expenditure ratios plotted over the period reveal that, in eight of the past 10 years, companies spent more on investment than they held in savings.
About three-quarters of capital expenditure, the study shows, has gone to new investments and expanding production lines, with the balance spent on maintaining existing infrastructure. This simply cannot be construed as a vote of no confidence in the country. In fact, the barriers to greater investment are more likely to be related to political uncertainty and business confidence, which is currently at a 30-year low.
Earlier this year, Reserve Bank governor Lesetja Kganyago also rejected the idea of an investment strike and said policymakers had to “provide an environment where business confidence thrives” if they wanted businesses to unleash their capital.
An extraordinary finding of the Intellidex report is that mining houses are so poorly valued because of policy uncertainty and a minister who acts unilaterally, and that their return on capital is lower than the interest they could earn on cash. Therefore, for them, to invest is to destroy value. Srinivasan Venkatakrishnan, chief executive of AngloGold Ashanti, says there are four ways to raise money: generate it, borrow it from the market, raise it from shareholders, or sell assets.
In the past few years, the mining industry has been walloped with inflation and electricity price and wage hikes, squeezing margins and burning up cash – all types of cash. “Add policy complexity and uncertainty: How do we take a long-term view of the sector? How do we convince financiers to invest?” he asks.
The findings are clear. There is no evidence of cash hoarding, and the overall growth of South Africa’s companies and the depreciation of the rand explains much of what our detractors deem an investment strike. We should stop repeating these myths.
Business and consumer confidence are at their lowest point in the entire 23 years of our democracy, so we should applaud our colleagues who run prudent, responsible companies, saving a relatively low proportion of cash to investment to ensure that if revenue comes under pressure, the risk to their companies, suppliers and employees is minimised.
Published in Mail & Guardian (22 September 2017)