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South African businesses hoarding cash, expanding abroad

By News Express on 21/05/2016

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South African businesses are flush with money. Too bad they are not willing to spend it at home.

They are hoarding cash or expanding abroad, put off by a stagnating economy, power shortages, low commodity prices and slower growth in export markets China and Europe. Delays in passing business regulations and a dispute between President Jacob Zuma and Finance Minister Pravin Gordhan are compounding their unease.

“Corporate SA has continued to build international business and not necessarily build industrial competitive businesses onshore,” said Hendrik du Toit, CEO of Investec Asset Management, which oversees about $109bn. “With a low currency they should be piling in. There’s a long-term confidence issue.”

Their reticence comes even though a plummeting rand is making South African exports cheaper, which should encourage the creation of new capacity. It has dived 56% against the dollar over the past five years, the worst performer of 16 major currencies monitored by Bloomberg.

That has done little to boost output: Growth has averaged 2.1% a year since 2011 and the central bank on Wednesday forecast an expansion of 0.6% this year. A business-confidence index compiled by the South African Chamber of Commerce and Industry slumped to 82.5 in April from a peak of 104.2 in March 2011.

Non-financial private companies had R725bn ($45.4bn) on deposit in South African banks at the end of March, up from R670bn a year earlier, South African Reserve Bank data shows. Fixed-capital formation by businesses increased just 0.4% after inflation in 2015, after declining 3.4% the year before.

“The economy is just not growing and the return on fixed investment is pretty low right now,” Arthur Kamp, chief economist at Sanlam Investment Management, said from Cape Town. “The incentive is to invest where the return is higher. Uncertainty is also going to affect investment very strongly.”

Little could be less certain than Gordhan’s political future. He was reappointed in December to a post he held from 2009-14, but only after markets went into freefall over the unknown MP Zuma previously named to the finance ministry. Gordhan’s goals of reducing the budget deficit and improving the management of state-owned companies to ward off a junk credit rating have not endeared him to the president.

Zuma has dismissed Gordhan’s demands to fire tax chief Tom Moyane for insubordination. Nor did he come to his defence after the Sunday Times newspaper reported the minister was at risk of being charged with espionage and fired for authorising the establishment of a rogue unit to spy on taxpayers when he ran the national revenue service. Gordhan said he was innocent and the allegations against him were “malicious rumours” that were “manufactured for other motives”.

‘Hung out’

“Gordhan is being hung out to dry,” said Nicholas Spiro, a partner at London-based Lauressa Advisory, which advises asset managers. “This is a textbook example of how to undermine policy credibility in an extremely vulnerable emerging market at the worst possible time.”

The government is making a concerted effort to increase the country’s productive capacity, according to Rob Davies, the Trade and Industry Minister. Companies were granted R10bn in tax breaks and other incentives in the year until March, which enticed them to invest R57.2bn, he said in a May 9 speech in Johannesburg.

Those betting on SA include BMW, which announced plans in November to spend more than R6bn at a plant that will produce the newest model of its X3 sport-utility vehicle, and MTN Group, Africa’s biggest wireless operator by sales. It plans to invest about R12bn in the country this year.

A number of mining companies, which have been hard-hit by the commodity slump and a depletion of deposits in SA, have chosen opportunities elsewhere.

Gold Fields, then the world’s fourth-largest gold miner, decided to spin off all but one of its South African operations in 2013, while AngloGold Ashanti, the third-largest, tried to do the same the following year. Harmony Gold Mining, which gets 95% of its production from SA, is taking advantage of a recovery in the rand gold price this year to build a war chest to invest in a new project in Papua New Guinea.

‘Tough period’

“We are going through a very tough period at the moment, so we’re not pretending that that is not happening,” Chris Griffith, CEO of Anglo American Platinum, the largest producer of the metal, said in an interview in London. “Our view is that those are short-term issues and difficulties rather than a structural reason why one shouldn’t invest in SA. You can still make money in SA.”

In addition to political turmoil, SA is experiencing policy limbo. Executives including Christo Wiese, SA’s richest man, and Johann Rupert, the billionaire chairman of Cie Financiere Richemont SA and Remgro, have complained that policy making is haphazard and ill-considered.

Banks are up in arms over proposed new laws that will enable the government to expropriate property without having to pay compensation at market prices, on the grounds that it will undermine owners and mortgage holders’ rights. Private security companies have objected to parts of a law awaiting Zuma’s signature that will force them to be locally controlled.

Parliament has taken years to process laws that intend giving the state a 20% free stake in all new energy ventures and enabling the mines minister to force companies to sell strategic minerals to local manufacturers, making commodity producers uncertain. Then last month, the government published new rules proposing that all mines should maintain 26% black ownership. The Chamber of Mines, an industry body, said its members were not consulted on the changes, which would prejudice existing shareholders.

“Investors who give us their money for projects have political risk very high on their radar,” said Johan Theron, spokesman for Impala Platinum Holdings, the world’s second-largest producer of the metal. (Bloomberg)

•Photo shows President Zuma.

Source News Express

Posted 21/05/2016 7:55:35 PM


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