Doubtful about amount of NFC surplus

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From Mr Gareth Williams.

Sir, Martin Wolf (“The sad record of fiscal austerity”, February 27) highlights the structural financial surplus of UK non-financial companies (NFCs) as an area for policy attention.

However, it is doubtful that this surplus is as large as current official estimates suggest. The Office for National Statistics’ most recent estimate (Q3 2012) is that UK private NFCs have £671bn in cash and currency deposits. This equates to 47 per cent of gross domestic product.

The biggest component of this figure, and the one that has multiplied over five times since 2002, is deposits with overseas financial institutions. The current methodology assumes that 80 per cent of BIS-reported UK non-bank overseas deposits are held by private NFCs.

Last September, the ONS announced a review of this method. It suggested that the rapid growth in overseas deposits may be due to the activities of hedge funds, fund managers, intra-group transfers and mortgage securitisation. Revised estimates are due for publication in July and are likely to see the stated cash position of NFCs revised lower.

If the revised overseas deposits follow the same trajectory as their domestic counterpart from 2002, NFCs will have £423bn of cash, a reduction of £248bn from the current estimate. Bottom-up measures, while not strictly comparable, are even lower. S&P Capital IQ data suggest that the UK’s largest 1,500 companies have balance sheet cash and equivalents of around £215bn. This equates to 15 per cent of GDP.

The cash position of UK private NFCs appears less rosy than thought. This suggests that corporate caution in relation to investment is rather more understandable than generally assumed.

Gareth Williams, Director, Sector Economist, Standard & Poor’s Ratings Services, London E14, UK

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