Companies have hardly used their savings for funding capital expenditures

A very interesting correlation that has been noticed has been that household and private savings have constantly declined over the years; just compensating for the rise in corporate savings. After the worldwide equity bust that occured around the year 2000, the debt component in the balance sheet was one of the major headaches for companies. Firms locked in high levels of debt, prioritized repayment of debt, and not to the surprise of many companies, have now channelled their savings towards debt servicing. Softening long term interest rates has also lured companies to convert their short term debts into long term ones. Moreover, companies have also increased their own equity holdings (through direct investments; and also through repurchases of shares). This equity increase trend would further gain momentum as companies are expected now to be in constant search for growth opportunities abroad. But dramatically, the IMF Report clearly proves that companies have hardly used their savings for funding capital expenditures.

For Complete IIPM-Article, Click on IIPM-Editorial Column

Source IIPM-Editorial,2006