To put it simply, we have houses and pension funds that are worth on average three times our annual after-tax income but, on a monthly basis, we spend more than we earn, which increases our debt levels and erodes our savings levels. This is why, for the first time in history, South African households have a negative savings rate.
From a macro point of view the country is in good financial health. The banks run little risk of losing money, because they can sell the assets for more than is owed on them.
For individuals, although we might be asset rich, if we get into financial difficulty we would have to sell our houses or cars to make ends meet because we have no discretionary savings.
Kevin Lings, economist for Stanlib, says households’ percentage of financial assets in pension funds has risen to 63%, nearly double the figure in the 1980s. But bank deposits have fallen from 15,5% of our financial assets to 7,6%. Pensions make up contractual savings and South Africa has among the highest level of contractual savings in the world.
Yet our discretionary savings, funds we would invest in a money market account or notice deposits, are massively negative. Apart from the fact that we are saving less in these vehicles, our increasing debt levels are eroding what little savings we make.
Lings says this is because South Africans contribute to retirement funds (usually legally binding with an employer) and purchase cars and other assets with their credit.
So, for example, a person might have R10 000 in a bank deposit, but have an overdraft facility of R25 000. That person has a negative discretionary savings of R15 000. As a country this negative discretionary savings more than offsets our contractual savings, which results in a negative savings rate.
Payments to our mortgage bonds are not considered by the Reserve Bank as savings, but rather as payment towards an asset. Lings says that if you pay an additional R1 000 into your bond each month this would not be seen as a saving, but would make discretionary savings less negative by reducing debt levels.
The United States has followed this trend for many years. It has had high levels of debt, but higher asset values, which offset the debt levels. Now South Africa is in a similar situation. Although it is not a threat to the financial institutions at this stage, we can learn lessons from the US.
First, we are more vulnerable to interest rate movements, as well as the equity and property prices. If interest rates move up and we are unable to service our debts we will be forced to cash in our assets. We are also vulnerable to equity and property prices because our asset wealth has been built up as a result of a prolonged equity and property boom, rather than savings.
South Africa Incorporated might have a sound balance sheet, but for individuals it is far more prudent to build up more discretionary savings, either through reducing our debt or doing more saving.