Cash & Liquidity ManagementCash ManagementCash Management RegionalThe untapped US$43 trillion in the global economy

The untapped US$43 trillion in the global economy

Why the biggest opportunity to free “trapped cash” is not repatriation.

One of the major issues in business news right now is a proposed tax holiday that would allow US-based multinational corporates to bring home profits earned outside the US. Estimates of this “trapped cash” total around US$2.5 trillion in assets.

While repatriation offers some economic promise, there are larger opportunities for economic growth. Here’s why:

When cash is ‘trapped’ by choice

Arguably, cash made outside the US isn’t trapped – corporates are free to bring it back to the country, but choose not to due to the comparatively high 35% tax rate if they repatriate the funds. While companies may not want to bring funds back to the US, they can use the cash in countries of origin. In this way, the funds would be put to work in the global economy rather than erode in value with inflation while sitting on a balance sheet.

Some of the “trapped cash” is at work directly or indirectly in our economy through corporate lending, according to Edward Kleinbard, former chief of staff of the Congress’s Joint Committee on Taxation. He stated the case in his testimony during a 2013 hearing of the US House of Representatives Committee on Ways and Means.

The estimated amount to be repatriated is US$2.5 trillion, although that potential total may differ from the actual amount firms choose to repatriate given a tax holiday. Whether funds get repatriated is up to each company. There is also the question of how repatriated funds get used.

How “trapped cash” is used matters as much as if it gets repatriated

How a corporate uses repatriated funds will depend on whether it is capital-constrained. Capital-constrained companies may use repatriated funds to invest in their domestic economic activities or to reduce debts. Approximately 26% of firms are capital-constrained based on a recent study by Berkeley Research Group. These investments could create job growth.

Most corporates are not capital-constrained. These companies may use repatriated cash for stock buybacks, shareholder dividends, and mergers and acquisitions. Historical evidence supports this. According to an article published by Bloomberg, nearly 90% of cash repatriated in a 2004 tax holiday funded these activities.

The primary benefit of cash repatriation to the US economy is a one-time tax revenue for the federal government, which could create jobs if used for infrastructure projects, plus any incremental increases in consumer spending by non-corporate investors that trickle down into the American economy.

The US$43 trillion in trapped cash that will benefit our global economy

There is a much larger stash of trapped cash within our global economy – and we can free it without a tax holiday. A lack of liquidity currently traps an estimated US$43 trillion that is hiding in plain sight, on the balance sheets of corporates across the globe.

Recent reports put total corporate cash stockpiles for non-financial corporations at US$1.68 trillion in the United States, US$672bn in the UK, US$1.1 trillion for eurozone countries and US$2 trillion in Japan.

Cash stockpiling by corporations is at an all-time high despite historically low and even negative interest rates in most markets. Excess cash left on balance sheets is an inefficient asset. It only erodes in value with inflation. Trapped cash doesn’t benefit shareholders or the economy.

Part of this trapped cash is created when corporates extend payment terms. The trend doesn’t show a sign of slowing. Globally, payments are delayed far beyond agreed-upon terms. The average days payable outstanding (DPO) on the books for large corporates – more than US$1bn in Generally Accepted Accounting Principles (GAAP) Cost of Goods Sold (COGS) – ranges from a 51-day low in North America to a high of 75 days in Central and South America.

At the same time, small- to mid-size enterprises (SMEs) have less borrowing power due to regulations for US financial institutions stemming from the 2008-09 financial crisis. Globally, there are similar liquidity issues for SMEs. In September 2015, the World Bank reported: “More than 50% of SMEs lack access to finance, which hinders their growth.”

The net result of this is a liquidity paradox. Corporates have excess cash that is earning low returns. SME suppliers cannot access affordable financing while managing longer payment terms.

SMEs form the broadest base of both the economy and supply chains. Create liquidity for SMEs, and they grow the economy. According to C2FO’s Working Capital Outlook Survey 2016, SMEs surveyed indicated that access to working capital would allow them to purchase more inventory or equipment (29%), invest in new technology (12%), and invest in employees through adding jobs or increasing wages (12%).

Solving the liquidity paradox adds the fifth economy to the global market

There’s no tax holiday to free US$43 trillion from balance sheets across the globe, but there is a way to solve the liquidity paradox that benefits both corporates and their suppliers through a working capital market.

This direct market allows SMEs to set their invoice discount rate in return for early payment, increasing their working capital at a lower cost than traditional borrowing. Access to working capital, in turn, allows the SMEs to invest in growth, add jobs and build local economies.

Corporates, as buyers, benefit by paying less for what they’ve already ordered. Cost reduction can be rolled up into consolidated company accounts, netting a higher, risk-free return than possible otherwise. Buyers strengthen their supply chain by reducing supplier financial risk and, subsequently, the physical delivery risk to the buyer.

Unlike repatriation, the potential benefit of a working capital market has a direct – and larger – impact on the shared global economy.

“There are four economies in the world with more than US$3 trillion in GDP. By solving the liquidity paradox for companies across the globe, whether we do it or it’s handled by a coalition of marketplaces, you could add back a fifth economy in the world, generating more than $3 trillion for the good of all of us,” says C2FO founder and CEO Sandy Kemper.

Plus, freeing working capital this way won’t cost 10% in taxes and doesn’t require changes to regulations.

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