South Africa’s savings culture is widely seen as very poor, and our propensity to consume very high. This has been evidenced by the spending experienced by retailers over the festive season in response to lower interest rates.
The argument for a poor savings culture is based on a comparison of the savings ratios of South Africa and developed countries. In the latter case, the ratio tends to be 25% or more of the gross domestic product (GDP); in our case it has been declining since the early 1990s to levels as low as 13%.
This article explores the option of increasing the savings ratio as a strategy for achieving macroeconomic stability.
According to the government’s growth, employment and redistribution strategy, savings in South Africa should be more than 23% of GDP a year in order to achieve growth rates of more than 4%. The recently released ipac/IDC Savings Barometer shows we are nowhere near achieving that goal.
Despite the remarkable improvement in the savings environment, gross saving as a percentage of GDP declined from 16,5% in the third quarter of 2003 to 15% in the fourth quarter of 2003. The lower ratio was evident in household, corporate and government sectors.
Reserve Bank data also shows that the ratio of gross savings to GDP between 1960 and 1992 was 20% or more. Since 1993 it has declined to below 15%.
Reasons for this include the liberalisation of financial markets, greater access to credit by households, rising marginal tax rates, persistent high rates of inflation over a long period, the lack of savings incentives, lower disposable incomes and the high cost of saving with financial institutions.
The present government has done well over the past 10 years in stabilising the macroeconomy. The challenge it has set itself in the next 10 years is to halve the unemployment rate.
One option would be for it to pursue a policy that deliberately encourages savings levels, as was done in Japan.
Savings can be defined as the amount of resources or income that is not immediately consumed, but withheld for future consumption or investment. Total savings in a country is the sum of saving by households, corporations and government.
Household saving is that part of current income after paying direct taxes that is not consumed. It includes current expenditure made in the form of a reduction in household liabilities, such as repayment of a housing loan or consumer durables.
Corporate saving is that part of a company’s profit that is neither paid as tax nor distributed as dividends, while saving by general government represents the total retained profits of public enterprises and retained taxes, and includes all other current receipts not disbursed on current government outlays.
Adequate savings, which are important for capital formulation and have a direct impact on economic growth, are vital in achieving macroeconomic stability.
They also reduce the country’s exposure to volatile international capital flows. For South Africa to be financially stable, it should not depend on foreign investment, which is vulnerable to changes in investor sentiment and sudden outflows.
Says Johan Prinsloo of the Reserve Bank: “In an environment of increasing international financial integration, a high level of saving helps to ensure macroeconomic stability.”
If South Africa pursues a cheap money policy in an environment with abundant credit available to households at low cost, it will ultimately face a fast-depreciating rand and high inflation.
Savings allow households to balance current against future consumption. This is relevant for new small entrepreneurs and black economic empowerment — you can only grow or start a business if you have previously saved. Financial institutions will issue loans to entrepreneurs with a savings track-record. And to lend, they need other people to save.
A recent pattern is that more and more emerging entrepreneurs expect to start businesses solely with borrowed money. This is problematic, as much reliance is being placed on empowering small and medium enterprises to create jobs.
Entrepreneurs should be encouraged to save because even if opportunities exist, if there is no money to launch new businesses and support the economy, no employment will be created.
Very few people realise the link between savings, growth and, ultimately, job creation. To create jobs you need higher investment in growth-producing activities like rent-generating buildings and factories, for which saving is a prerequisite.
Saving should also be seen as saving resources. Even the poor can save if trained in how to stretch their money and spend it wisely. Children should be taught the importance of saving and saving vehicles at an early age. Such personal financial literacy can be achieved through the cooperation of financial institutions, the government and community organisations.
In their pursuit of macroeconomic stability and economic growth, policymakers should not ignore the importance of a strong domestic savings performance. The government has succeeded in reducing budget deficits — the challenge now is to get households to do the same.
What is needed is a shift in the South African mindset, from a culture of high consumption and debt to a saving culture.
The government has started to encourage savings by introducing new bonds accessible to smaller investors, to be launched in May. Small investors will now access these bonds from as little as R1 000. It remains to be seen whether the authorities will also give tax breaks sufficient to make these bonds attractive to the public.
Simangele Sekgobela is South African Savings Institute chairperson and senior economist at the Industrial Development Corporation. E-mail: www.savingsinstitute.co.za