We have overcome a massive hurdle – but SA Corporates remain cautious
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15 June, 2016 | Sean Segar
Local corporates continue to stockpile R725 billion in cash instead of deploying to growth projects.
Ratings agencies have given South Africa a breather by keeping the ratings for the country above the feared junk status. However, the shock of Nene-gate and the dramatic economic consequences remain very much top of mind as South African corporates continue to withhold cash reserves and defer growth decisions.
This sentiment emerged from the Nedgroup Investments Treasurers Conference that took place in Johannesburg in late May.
“With approximately R725 billion in cash reserves currently sitting on the balance sheets of South African non-financial sector corporates, it is clear that companies are holding back. The crisis that unfolded following President Zuma’s strange decision in December to fire then-Finance Minister, Nene, shook SA Corporates to the core and created a cloud of uncertainty that still lingers. Decisions are being deferred and cash is being held back as opposed to being deployed for growth,” says Sean Segar, Head of Cash Solutions at Nedgroup Investments.
Segar says practically every speaker at the conference brought up the events of 9 December 2015, and local treasurers spoke with a unanimous voice when reflecting that business confidence in South Africa is at an all-time low in the wake of very turbulent economic and political developments.
However, the good news is that the dust is settling, and South Africa has come through all three rounds of rating agency reviews and avoided junk status.
“The decision taken by rating agencies to re-affirm the country’s investment grade status reflects the positive outcome by government, business and labour working together, even if they did leave it a little late, and despite some factions’ self-destructing behaviour,” says Segar.
“Hopefully lessons were learned whilst we were under the rating agency spotlights. The message from the ratings agencies is very clear: foster economic growth and ensure political stability, or face downgrades at the next reviews and all the negatives that come with that. It is now crucial that every South African does their bit to demonstrate to those rating our country that we are not junk, that we have confidence in our country and that we can keep working together. Most South Africans relish a challenge, so here is one to rally around,” he says.
Among issues discussed at the Treasurers Conference was how corporates could start to regroup and accelerate the path to growth for their businesses in the current turbulent markets.
“The small boost from the rating agencies has lifted confidence slightly and we hope this continues, but the key issue at the moment is to ensure that while corporates are in this phase of holding back, cash withheld is working as efficiently as possible,” says Segar.
At times like this when companies have high cash reserves of billions of Rands, a difference of 1 or 2 per cent yield is significant, particularly in times of such low earnings growth. Therefore, according to Segar, corporate treasurers are increasingly making use of Money Market funds to park cash in this interim period.
“Of course the most desirable scenario for all is to have this cash deployed into the expansion of local companies and therefore create jobs in the local economy,” says Segar.
Sean Segar is Head of Cash Solutions at Nedgroup Investments.
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