A pro-business budget is crucial in order to trigger a much needed cash injection into the South African economy. The budget should focus on encouraging business confidence and investment in the coming year, so that business injects the record cash balances that they have built up into the economy.
This is according to Sean Segar, Head of Product at Nedgroup Investments Cash Solutions, who says he would like to see Pravin Gordhan’s budget speech next week focus on creating a positive business and savings environment locally. He says this is necessary to restore corporate confidence in the South African economy after the recent months of uncertainty and unrest.
“It is crucial that the investment confidence of South African corporates is restored. A good budget speech will provide corporates with the confidence to spend their cash pile which could have a very powerful mobilising effect on the economy,” he says. “The same applies to foreign investors who control vast sums of investment flows.”
“Imagine the effect on the economy and job creation if South African corporates begin aggressively investing their R570-billion cash at the same time as foreign investors increase their allocation to the country. A secondary benefit of inbound investment is the fact that it would result in a firmer currency and reduce the threat that inflation is posing to the economy,” he says.
The table below clearly highlights the inverse relationship between business confidence and non-financial corporate cash piles.
“Our view has always been that locally based corporates have been steadily building cash piles as a result of a lack of confidence in South Africa due to political unrest and a troubled economic climate. Furthermore banks have not been lending as freely lately and as a result, companies have been holding onto cash reserves to cover themselves for any eventualities,” he says.
Segar says the Finance Minister should introduce creative incentives for companies to invest capital instead of holding it in cash, and should also create an environment that will encourage banks to lend again.
“We don’t want to see negative enforcement such as penalties for holding cash, but innovative incentive schemes and investment incentives could go a long way to stimulating much needed economic investment,” he says.
“At current low interest rates even the best invested cash on corporate balance sheets creates a drag on earnings and return on equity.”
Segar also says it’s very likely that Pravin Gordhan will provide some clarity on the proposed national savings scheme and changes to the country’s retirement funding which has been evolving slowly.
“There will definitely be a focus on encouraging savings and investment among all South Africans. The intentions of retirement reform and other proposed savings initiatives are very encouraging to us and we look forward to more clarity on the issue in this year’s budget address,” says Segar.
Segar says he also hopes that the Budget Speech will address the issue of execution.
“Government needs to ensure that the execution of the allocation of the budget as outlined next week is sound. We would like to see some direction in terms of accountability and responsibility of how the allocation of funds will be managed following the budget speech as this will also go a long way to restoring much needed business confidence,” he says.