The National Treasury’s long-awaited retail bonds, to be issued from May 24, are welcome as a move to boost savings by small investors.
Savings rates in South Africa stand at 16% of gross domestic product; to grow the economy meaningfully they should be at least 20%.
The three retail bonds target lower-income and middle-income earners in lifestyle measurement (LSM) five to eight, earning an average annual income of between R25 000 and R89 000 and having access to an account with one of the four major banks.
Informal investors in LSM one to three are excluded.
Investors can invest between R1 000 and R1-million for a fixed period of two, three or five years.
The government is aiming to attract 11-million investors, to finance 10% of its debt. Instead of borrowing externally, it will finance borrowing requirements through domestic retail investors.
The bonds’ main appeal is their guaranteed return at maturity. The interest rate for the two-year bond is 9,25%, on the three-year bond 9,5% and the five-year bond 10%. The rate is constant until the bond matures.
Other major advantages of retail bonds over other retail investments is that there are no investment costs, such as commissions and administration fees. As returns are guaranteed, they carry almost no risk.
Interest payments can be re-invested, enabling investors to benefit from compounded interest. The product will appeal especially to risk-averse pensioners and parents saving for their children’s education.
Payments are made twice yearly, on March 31 and September 30, and are restricted to South Africa’s four major banks. Bonds are not tradable on the market, and carry a penalty for early withdrawal. They are only available to natural persons with a valid South African identity document and cannot be used as collateral for debt.
One of our concerns is that rural investors may not have easy access to retail bonds. The Post Office is the main sales channel, and rural post offices may not be fully equipped to handle applications, while selling bonds will add to their workload. The Post Bank has not been as successful as hoped in mobilising the savings of the poor.
By their nature, retail bonds exclude savings groups such as stokvels and funeral societies. Very few people in LSM five to six can save R1 000 and forgo access to the money for at least two years. They can only save by investing as a group.
Savings groups are very popular among the poor and are effective finance-raising devices for those without access to formal banks.
One reason for South Africa’s poor savings record is that poor people have no access to formal banking. Payments to retail bond-holders are restricted to the major banks, excluding informal savers without accounts. Well-developed rural banks catering for poor rural investors should be considered as an option.
Also, the government should consider not restricting the sale of retail bonds to the Treasury’s Pretoria head office. To broaden access, an option would be to use provincial offices as well.
Coinciding with South Africa’s successful soccer World Cup bid, the bond launch provides a wonderful opportunity to raise much-needed funds for projects relating to the World Cup, without incurring high debts through foreign borrowing.
Savings will trans- late into investment in income-producing projects, economic growth and jobs. For the first time South Africans have the chance to do things for themselves, instead of depending on others to do them for them.
Simangele Sekgobela heads the South African Savings Institute