STUART THEOBALD: Why domestic demand is less vulnerable than it once was

One of the seldom-mentioned strengths of the SA economy is how diversified its savings pool is. Thanks to the relaxation of exchange controls over the past 30 years, South Africans have extensive assets abroad. Not only that, but many large SA companies are well diversified globally.

The result is that domestic wealth is not directly linked to economic performance. If the supply side of the economy tanks, as it is now thanks to the electricity and logistics crises, the value of assets, and therefore spending, does not plummet alongside it.

That is because the pensions and discretionary savings of South Africans have significant exposure to offshore markets, while domestic companies’ earnings are diversified. As a result, a significant part of spending keeps going, supporting the supply side despite its troubles, providing an important source of resilience.

Investment plus

SA is one of few emerging markets that has a net positive investment position. This means that South Africans own more investments abroad than foreigners own here.

The net position turned positive in about 2015 but had been trending in that direction for some time and is now close to a record R1.9-trillion. This positive position is on the back of the growth of SA assets abroad, rather than foreigners exiting SA. Indeed, South Africans now own about R10.5-trillion abroad compared with R2.5-trillion 10 years ago.

Foreign interests have doubled over the same period, from R3.2-trillion to R8.6-trillion, though this is steady in dollar terms. In part this growth has been driven by the declining value of the rand, which makes all foreign assets more valuable in rand terms. But even in dollar terms, South Africans’ offshore assets have doubled over the past decade. Consider that the entire domestic banking system holds deposits of R5.3-trillion and you get a sense of how material these foreign assets are.

Consider how different things were back in 1994 when SA re-entered the global economy. Large SA businesses were all conglomerates — Anglo American owned everything from mines to banks, brewers and furniture makers. It, along with the likes of Rembrandt, Anglovaal and Barloworld, had become sprawling monsters because they were trapped in the domestic economy. Pension funds were forced to invest almost entirely in those domestic companies and government bonds.

Now Anglo American is a global miner with little of its balance sheet in SA. Pension funds can load up with Anglos and the shares of other globally diversified businesses, but can also invest 45% of their savings directly into foreign markets. Individuals can also invest up to R11m a year offshore. So there is a compounding effect: domestic assets are much more international, and domestic savings are much more international.

Last week’s bank earnings reports were just one indicator of the positive effects of this diversification. Thanks to business, particularly in the rest of Africa, Standard Bank and Absa both reported strong growth in earnings from their businesses in the rest of Africa.

Absa, for example, boasted an 84% increase in profits for its retail and business bank in the rest of Africa, but domestic retail profits fell 21%, while small business and wealth banking grew just 9%. Its shareholders, many South African, will feel more confident in their spending behaviour than if performance had been constrained by a concentrated domestic exposure.

Of course, there is also a negative interpretation of the international diversification: it is money that could have been invested in expanding the SA economy. But, a point politicians so often miss, money chases returns, not the other way around. The fact that SA businesses and savers can generate higher returns abroad than domestically is good for the SA economy.

It means they have money to spend in it (as well as capital to invest in when the potential returns justify it). Also, openness means SA is a major beneficiary of foreign investors, both direct and portfolio, even if these have not grown for a decade. Diversification of investment sources is another source of resilience for the economy.

Domestic demand

This means that companies can tap sources of domestic demand despite the poor state of the economy and weak business and consumer confidence. Bank credit performance stays relatively strong in some segments such as mortgages because clients tend to have a level of diversified savings.

Of course, this cannot hold out against all ravages. If  consumers are forced to rely on their savings because they cannot generate income in a weak domestic economy, eventually they will be exhausted no matter where they are invested. But it provides an important buffer. It is a source of demand that I would expect many domestic businesses — from banks to retailers — will be aiming to serve into.

While it is only those formally employed with pension and other savings that will benefit directly from the foreign assets effect, their spending power is important in driving the wider economy. Were the economy structurally more like it was 30 years ago, their spending would have plummeted, compounding domestic economic woes. So even though the supply side is condemned by blackouts and an inability to get goods out of ports, companies can at least take some succour in the fact that domestic demand is not as vulnerable as it once was.

• Stuart Theobald is chair of Krutham (formerly Intellidex), a research-led consulting house.

This article first appeared in Business Day