Some economists are looking at the piles of cash in Corporate Canada’s bank accounts and seeing visions of a spending spree that will turbocharge the economic recovery. But before we get too excited about that possibility, we need to think about where a lot of that cash came from.
One major source lies just on the other side of the balance sheet: the debt side.
While the data suggest that private-sector businesses have built up roughly $80-billion in excess savings during the pandemic, the numbers also show that this has been accompanied by sharp increases in corporate borrowing. Non-mortgage loans among private non-financial corporations, for instance, were $50-billion higher at the end of the third quarter of 2020 than they were before the pandemic, according to Statistics Canada figures. Corporate bonds outstanding were up by roughly another $50-billion.
A lot of this cash buildup represents businesses’ reaction – in many cases defensive, in others certainly opportunistic – to the pandemic, and the financial curveballs it threw at them. The result was a lot of just-in-case borrowing, much of it at favourable rates, to stockpile cash as a safety net in a time when both future profits and access to debt markets looked far from secure.
“As companies get more comfortable that they don’t need this much liquidity, they might pay down some of the borrowing that they did early on in the pandemic,” Bank of Montreal chief economist Doug Porter said in an interview last week.
Mr. Porter traces the surge in cash back to last March, when pandemic fears were rising fast and financial markets came under severe pressure, amid concerns of an impending financial crisis. Having witnessed the liquidity crunch that tied up the financial system in the previous crisis in 2008, many businesses rushed to tap into lines of credit while they were still available – whether they needed the money or not – for fear of getting frozen out of an increasingly dysfunctional market.
“Memories of 2008 were fresh in the minds of many companies. So there was some precautionary borrowing. That’s part of the reason why there’s so much money in cash,” Mr. Porter said.
The Canadian government added to the pile with its Canada Emergency Business Account, or CEBA, a program that has granted interest-free loans of up to $60,000 to Canadian businesses – with one-third of the loan forgivable, as long as it’s repaid by the end of 2022. Frankly, any business would be foolish not to take the money, whether they needed it or not, and simply pay back the non-forgivable portion when the time comes. For a significant portion of the more than 800,000 business owners who tapped the program, that appears to be exactly what they have done. This program alone has poured nearly $40-billion into business coffers that wouldn’t have been there otherwise.
“So that factor could, potentially, account for half of the [savings] increase alone,” Mr. Porter said. And given the repayment terms, much of it will head back to the government over the next two years.
Combine all of that with the sharp decrease in capital spending last year, as industries slowed or in some cases even went dormant because of the pandemic, and you end up with this substantial swelling of cash reserves.
Still, even if all this cash isn’t as available as it might at first appear, a case can be made that the corporate sector is well-positioned for an investing surge when the pandemic fades and economic conditions improve. Maybe not to the tune of an extra $80-billion, but the cash buildup certainly creates opportunities.
Consider that the borrowing costs on this cash have been unusually low – in the case of the CEBA money, actually below zero. With interest rates at record lows, businesses have been able to tap the market for bonds and loans at extremely attractive terms. Returns on investment don’t need to be particularly spectacular to justify investing that ultracheap cash on equipment upgrades, new technology and expanded facilities. The simple arithmetic suggests it may make more sense to put the money to work than to rush to pay it back. (This, indeed, is a key reason the Bank of Canada has pledged to maintain rock-bottom interest rates deep into the post-COVID-19 recovery.)
Some observers are also looking to Ottawa’s pledged $70-billion to $100-billion stimulus program to include generous incentives for the corporate sector to accelerate investment. But Mr. Porter, for one, doesn’t think policy incentives will be necessary – provided the coronavirus spread is tamed.
“I’m not sure this is really a policy issue,” he said. “I think what businesses need is a little bit more certainty and clarity on the fundamental economic backdrop. And that’s, first and foremost, going to be determined by what happens with the virus.”
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