With business confidence at an all-time low in South Africa and flows offshore by retail investors at record highs in over a decade, non-financial corporate cash balances are sitting at R725 billion – almost the highest level on record.
However, while holding large cash reserves is a common symptom of an increasingly pessimistic economic outlook, these companies are well-positioned to invest quickly should confidence improve, particularly by making smart use of these cash reserves in the interim.
This emerged from discussion at the annual Nedgroup Investments Treasurer’s Conference held in Sandton yesterday. The conference was attended by a selection of South Africa’s top corporate treasurers and covered a range of issues currently affecting local business sentiment, particularly political factors.
According to Sean Segar, of Nedgroup Investments Cash Solutions, it is an anomaly that corporates have so much cash despite tough trading conditions and low interest rates, but it is directly related to business confidence.
“The reality is that companies are always looking to fund expansion and acquisitions. However, the current political environment is clearly a burning issue among treasurers at the moment. And, with banks not lending as freely as in the past as a result of the stricter Basel 3 capital requirements, and uncertainties across key sectors, companies are holding on to their cash and even building this to create a buffer in uncertain times.”
Segar points to SARB data released for March 2016 which shows that corporate cash balances are near all-time highs. “Over the last 5 years as business confidence has fallen, corporate cash balances have risen. In fact, the data below shows that corporate cash balances have been rising steadily since mid-2010. While this data is based on the BA900 which does not take corporate debt into account, it is still a very interesting indicator and definitely reflects the views of local treasurers at the moment.”
Segar says it’s clear from the discussions of the conference that South African treasurers are looking for ways in which to strike a balance between financial prudence in the current subdued markets, and their companies’ long-term growth objectives.
“Especially in such volatile times, treasurers agree that companies should be looking to maximise the return on their cash reserves by ensuring that the cash they are sitting on is working as hard as possible, but without taking on unnecessary credit risk or locking up their funds for too long” he says.
Segar points to Money Market funds as a great haven for treasurers to maximise the return on their cash reserves by ensuring that the cash they are sitting on is working as hard as possible while waiting to be deployed. He says by making smart use of this kind of vehicle, companies could benefit from the yields of fixed deposits with the access of a call account.
“Money market funds are well established and extensively used by corporates in South Africa and abroad. Money Market funds offer treasurers a higher yield on their cash balances while still retaining immediate access to their funds as well as the security of a highly regulated and rated environment, making them an ideal vehicle for treasurers in the current volatile conditions.”
“In times where earnings are hard to find, it makes sense that corporates cash is optimally deployed. We hate lazy. The financial benefits of being smart now and earning higher yields on these abnormal cash balances add up and make a difference to a company in the long term,” says Segar.