Corporate South Africa appears to be on an investment strike, with vast amounts of cash lodged in banks and not invested in the economy. Long-term cash hoarding is unpatriotic and counter-intuitive and is directly linked to slow economic growth. At its national general council in October, the African National Congress would do well to consider following the example of fellow Group of 20 nation South Korea, which instituted an anti-cash-hoarding tax law that has seen investment increase.
The next African National Congress (ANC) national general council in October should examine the extent and the reasons why corporate South Africa is on an investment strike. Since the short recession in 2009, South Africa has seen a dramatic tapering off of investment by business, causing industrial and labour turmoil. The key to this is vast amounts of cash lodged in banks and not invested.
In 2010 as South Africa was due to host the prestigious Fifa World Cup tournament, workers at various stadia construction sites, including the Gautrain project, went on strike demanding better pay. Construction companies had decided to retain cash incentives to raise productivity. It later transpired that many of the top-tier construction firms had created an illegal cartel to loot the state coffers of hundreds of millions of rands through a carefully orchestrated scheme of bid rigging and price inflation. Even with these illicit millions, bosses still refused to reinvest money in the economy through wages or dividends and the like.
These corporations were given fines by the Competition Commission, which in itself showed the under-capacity of the commission and the vastness of the area it covers. The inflated prices have stayed with the market so the fines mean nothing. The very fines were paid from illicit earnings or revenue.
This tells a story not only of corporate greed and corruption but of the pervasiveness of the lack of patriotism of corporate South Africa. Although this issue is not unique to this country, South Africa’s case also involves broader, complex sociopolitical attitudes that developed in 1990. The key to the lack of patriotism of global corporations is their refusal to reinvest profits in countries’ economies.
The Apple Corporation, makers of the iPhone, is regarded as one of the biggest cash hoarders in the world, causing policy makers in the US to consider tax law amendments to try to encourage hoarders to spend money in the economy. One Group of 20 (G-20) country that has instituted an anti-cash-hoarding tax law is South Korea. South Korea’s top 10 enterprises had a total of $29-billion in reserves at the end of last year.
Other G-20 countries such as Japan have urged corporations to raise dividends to shareholders, while China ordered its state-owned businesses to boost dividends paid to the Chinese state to help fund the fiscus. In 2011, an academic paper that looked into US corporate cash hoarding found that nearly $7-trillion, was held in cash by local and multinational companies. Japanese companies are said to be holding a record $2.3-trillion in cash.
In 1909 the US Congress adopted corporate income tax aimed at discouraging companies from hoarding cash, which slows economies. Congress put a 15% penalty tax on excessive hoards of cash. In 1986, the law was relaxed to exclude cash held overseas.
In South Africa, bank cash reserves – above those of the Reserve Bank – total approximately R1-trillion. The Reserve Bank reported a lesser figure – R700-billion in corporate deposits in South African banks (by August 2015). About R549-billion has been sitting on the balance sheets of corporations since 2006. This accounts for about 20% of the country’s gross domestic product going unused.
R500-million deployed into the economy could see 120,000 jobs created and nudge the economy up by at least 1%. It could also spur a multiplier effect in other sectors. Investors do not need a company to hold their extra cash, they need the company to pay dividends and invest in growth. Employees require employers to invest in the future, replacing old factories, purchasing new equipment and engaging in other activities that employ people in pursuit of sustainable future profits.
The cash hoarders by and large are the first to retrench workers and create elaborate plans to dodge or delay paying taxes. They are also leading demands for an unregulated job market, low wages and temporary contracts. Often, emerging countries are used by large corporations as vehicles for their transfer pricing to reduce the taxes they pay back home.
With the continued relaxation of exchange controls, corporate South Africa shuns its base in South Africa, instead deploying the cash earned in the country for African and global growth. Christo Wiese’s Brait and the Public Investment Corporation lead the pack in seeking external exposure.
South Africa sees many companies including Anglo American making their initial capital in South Africa only to use it to expand externally, dropping South Africa as a priority in the process. Often these corporations proceed to ignore how they made the capital and start bad-mouthing the local policy framework.
Aside from corporate cash hoarding, South Africa’s pension funds trustees are not fully adhering to the Pension Fund Act’s Regulation 28 on the spread of asset allocation. Pension funds are sitting with more than R6-trillion in cash, which could be invested in the economy.
While there may be understandable reasons why cash hoarding may be necessary at times of policy uncertainty, South Africa is unique in that its cash hoarders are influenced not by policy or a lack of opportunities but by party political considerations and a suspected campaign to engineer a regime change. With about 97% of the economy controlled by the minority race which is belligerent to the governing majority, the disjuncture between Johannesburg Stock Exchange earnings and growth and the cash invested in the economy is wide and inexplicable in terms of economics and business considerations.
The so-called policy mismatch or bad policy framework are not supported by hard data since in the more than 10 years until September 2012, there were 73 companies with an annual return that beat the ALSI’s 52-year average total return of 20% per year – and 10 companies even beat 40% growth per year. The question would be: Where does the money go? Do shareholders, employees, and research and development get fair allocations so tha the money circulates or do corporations hoard it and instead boost executives’ performance bonuses?
While key G-20 countries have anti-cash hoarding tax regulations, they are due to normal economic considerations, whereas South Africa has a unique political and economic history which has seen money in racial terms and refuses to transform from its ugly past. It will thus seem that South Africa has a compelling reason to have the ANC national general council deliberate on the possibility of a tax regime similar to that of South Korea, which has seen investment increases since the law was passed.
Countries which do not have anti-cash hoarding laws have seen their central banks impose negative interest rates on cash, whereby cash becomes expensive to keep in the banking systems. All of these are advanced economies belonging to the G-20 and the Organisation for Economic Cooperation and Development.
The investment strike must be called by name and systematic policies developed to counter it. The lack of a patriotic corporate citizenry is also a key factor influencing the investment strike and cash hoarding. The ANC has failed to develop a patriotic bourgeoise which puts national security and interests first, and this has kept an unhealthy misallocation of asset ownership and a lack of fair equity among citizens. Perhaps, out of the black industrialist policy such patriots may come.
Importantly, it is clear from data that the high-growth years were accompanied by less cash hoarding by corporations. Policy makers must understand that the ratio of public private economic contribution is 70/30, which the National Development Programme aims to change by 2030.
Other than the required punitive tax measures, it is clear that before promoting the country abroad, Brand South Africa should start promoting South Africa as an investment destination at home to fellow South Africans and in particular to corporate South Africa.
Long-term cash hoarding is unpatriotic and counter-intuitive and is directly linked to slow growth as the natural cycle of commerce is disturbed by hoarders who play selfishly and flout the rules of currency float. Hoarding cash must come with cash costs. Many of South Africa’s slow growth and inequality issues relate to cash hoarding and international monetary policy which sees the US dictating to the world and exporting inflation.
Because Judge Dennis Davis’s tax reform commission is still carrying out its work, the ANC national general council should consider taxation policy in context. DM
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