Rate cuts – All the more reason to shop around while corporates await the GNU Economic Growth Plan

The South African Reserve Bank has provided a clear indication that the downward interest rate cycle has begun. While this brings much-needed relief to consumers, the country’s business community must act quickly to ensure the interest they earn on their large cash piles is not eroded.

This is the view of Ian Ferguson, the co-head of at Old Mutual Cash and Liquidity Solutions. Ferguson says this can be achieved by taking advantage of money market funds which provide better yields than call accounts, without the user having to give up liquidity. The money market fund industry is well established, extensively used by major corporates and highly regulated. Many funds are independently rated. Not only are yields attractive, but the funds offer a single-entry point into a diversified basket of exposure, predominantly to the large domestic banks, depending on the money market fund used.

“The start of the rate cutting cycle with the 25-point cut at the September MPC meeting, is a good opportunity for corporates to review their options outside of bank call and / or current accounts into same day liquidity funds such as money market funds offered by most asset managers. We expect another 100-point cut in the cycle, which is consistent with the comments made by the Governor” says Ferguson.

Cash and Liquidity Solutions, a growing capability within the Old Mutual Wealth portfolio, provides a range of cash and near cash funds to clients with surplus cash to park. These solutions present institutional investors with an alternative to traditional call accounts, and offer attractive yields, same-day liquidity, and the convenience of a diversified basket of highly rated bank instruments in a well-regulated investment environment.

It is common knowledge that South African companies are currently sitting on large amounts of cash reserves as business confidence levels have remained stubbornly low in the low economic growth environment with a lack of political stability.

“Instead of investing their capital for organic growth, corporates are opting to keep cash in bank accounts as they await a clear economic development plan from the newly structured Government of National Unity (GNU), following the country’s recent general elections,” explains Ferguson.

Research from Old Mutual Wealth’s Cash and Liquidity unit shows that SA non-financial corporate deposits have grown by more than 9% this year to over R1.2 trillion in 2024. That’s well above inflation growth as released Tuesday of 4,4%.

“This is a clear indication of a lack of confidence in our economy’s ability to reward shareholders if these companies reinvest their cash assets into the domestic economy,” says Ferguson who adds “that the ‘wait and see’ approach was exacerbated by the COVID-19 pandemic and the build-up to the elections. Now, it is being fueled by the need for clarity on the economic growth strategy the GNU will pursue in this administration”.

The absence of a clear economic policy that incentivises companies to reinvest for growth domestically is depriving the economy of the growth opportunities it desperately needs, particularly if it wants to decisively confront the country’s stubbornly high unemployment situation.

However, Ferguson advises that while waiting for a clear direction from the GNU, companies have grown their cash reserves. This strategy results in companies having more capital to invest when the government communicates it’s much-awaited economic growth policy. If this cash were to be injected into the economy, it will make a big difference to GDP growth as the multiplier effect in South Africa is powerful.

Ferguson explains that companies can park their cash reserves in a money market or enhanced money market solution offering better yields than traditional bank deposits rates.

“The yield on money market funds lags the call rate during a rate cutting cycles allowing users to earn higher returns on cash due to bank account yields falling immediately following a rate cut. Money market fund yields take longer to reset meaning they stay higher for longer,” Ferguson notes.

This investment opportunity is designed for companies with surplus cash that needs to be temporarily parked, optimizing the opportunity to earn returns on that cash without being tied up in long-term fixed deposits.

“This also presents a significant opportunity for businesses building cash reserves in an uncertain economic environment. As SA Inc. waits for the GNU’s clear economic growth policy, and domestic interest rates remain at multi-year high although forecast to decrease, the opportunity to secure returns that exceed inflation could soon become a thing of the past for business to cash in through the cash and liquidity instruments,” Ferguson concludes.