SA’s companies shy away from bringing bacon home
Business Day Live - Jun 15th 2016, 11:23
Now that MTN has managed to have its fine in Nigeria cut down from $5.5bn to $1.7bn, can we have our money back?
The trouble with South African companies running into big trouble abroad is that their woes can easily spill over into our balance of payments. It surely can’t be too far-fetched to speculate that the reason the latest balance of payments figures show a sharp drop in dividends paid to South African parent companies by their foreign subsidiaries might just have something to do with MTN’s need to hold on to cash in Nigeria.
It may not have been the only culprit, with more than one company finding lately that it is always easy to make profits offshore, particularly in the rest of Africa, where bringing profits home in the form of dividends can be an issue, given currency constraints some countries have imposed.
The Reserve Bank, as always, is ultra-discreet about whose dividends are flowing and in which direction. However, dividend receipts and payments have become a key swing factor for the current account of the balance of payments. A jump in net deficit payments was the main reason the first-quarter current account deficit came in so much higher than expected in the first quarter of this year.
Interestingly, the picture was quite the reverse two years ago, when the market was startled (and the rand strengthened) by a current account deficit that came in considerably lower than expected because of strong dividend receipts from South African companies’ offshore operations.
That trend of growing dividend inflows from South African companies’ outward foreign direct investment, as well as on the stocks and bonds South African investors hold abroad, had been in place for three years from 2013 to 2015, with a weaker rand adding to the bounty.
However, the first-quarter figures from the Reserve Bank don’t look good. Dividend receipts related to South African companies’ foreign direct investments are running at less than a third of their 2015 level, and at R10.8bn in the first quarter, are less than a quarter of their peak of R45bn a year ago. Dividends on portfolio investments are down, too. The result is that total dividend inflows, at an annualised R34.5bn for the first quarter, are running way below 2015’s R65bn, while total dividend outflows are running at R121bn, and the net negative has more than doubled.
The current account comprises both the trade balance and the income and services balance, which includes items such as dividends, interest, royalties, and tourism payments. Economists predicted, correctly, that the trade deficit would narrow, but what they got wrong was the extent of the deficit on the services and income account, which widened from 3.6% of GDP in the fourth quarter, to 4.1% in the first quarter, with the current account deficit jumping to 5%.
One quarter’s numbers should never be taken too seriously, and the economics of the services and income account are not well understood anywhere, so SA’s economists are not alone in finding it hard to predict.
Even so, the latest trend is disturbing at a time when one might have expected that all those companies that have expanded internationally would be bringing back ever more dividends in rand terms. A trend suggests that even when South African companies make good money abroad, they may choose to keep it there because investment opportunities at home are less than inspiring and policy, less than certain are.
This is reinforced by Reserve Bank figures that show, yet again, that South African companies did more outward investing abroad than foreign companies did inward investing into SA in the first quarter. It is paralleled in the sharp 6.8% decline in real private sector investment spending in the first quarter, following a decline in private sector investment for 2015.
The latest figures also show a sharp decline in export volumes, and while import volumes fell, too, so the net effect on the trade balance was positive, SA’s export performance in recent years has been worse than might have been expected, given the rand, whose weakness should have made exports more competitive.
The Bank calculates the real effective exchange rate of the rand declined almost 12% in the year to March. Yet export volumes have been falling, and a recent study by the International Monetary Fund finds political and policy uncertainty has constrained export performance, deterring investment in export-related activities.
That’s not good for the trade side of the current account, nor for the income side. The quarterly swings and roundabouts might be hard to predict but the deficit, clearly, will be with us for some time to come.From Business Day Live
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