July is National Savings Month. It is an opportunity for the country’s banks and financial institutions to raise awareness of the importance of savings, and for each and every South African to revisit their financial plan.
Throughout July the media is chock full of savings articles as industry stakeholders collaborate to get the message out. With household debt near record highs and household savings in a downward spiral South Africans would do well to heed the call to save.
According to the 2010/11 Global Competitiveness Report, South Africa’s 2009 gross saving rate was just 16% of GDP. Two years later the South African Reserve Bank Quarterly Bulletin, June 2011, records a virtually unchanged rate at 16.3% of GDP. We have been left behind by our fellow BRICS economies China (gross savings of 52% of GDP), India (37%) and Russia (22%).
“These are the countries whose populations are investing heavily in their nation’s development — just as the Japanese turned their war-racked country into an economic superpower in the 20th Century,” said finance minister, Pravin Gordhan, as he delivered the keynote address at the South African Savings Institute’s (Sasi) 10th anniversary recently.
Sasi was established in 2001 and is at the forefront of the battle to improve the country’s savings rate. “We are committed to inculcating and nurturing a culture of savings in all South Africans, young and old,” says Sasi chairperson Prem Govender. The organisation is particularly active during savings month, utilising every opportunity to remind consumers of the need to save, as well as the benefits of a strong savings rate, both for themselves and for the country.
“This year’s theme is ‘SAVE NOW’.
We want to people to understand that it is never too late to start the savings habit,” she says. Why is South Africa’s savings performance so poor? To answer this question we need to better understand the savings environment.
Economists consider three main sectors when calculating the gross savings rate, namely government, the corporate sector and households. The 16.3% gross savings rate quoted earlier consists of 15% savings from companies, a disappointing 1.5% from households and an even more worrying 0.3% dis-saving from government.
South Africa’s household savings has declined by an average 0.1% per annum going back a decade, prompting the finance minister to set a target of a 6% for South Africa’s private saving rate as part of his performance agreement with President Jacob Zuma. Sasi breaks the domestic household savings environment into short-, medium- and long-term savings.
“Short-term would be savings for school fees and holidays, typical medium-term objectives would include savings for university education and long-term plans would focus on accumulating capital for retirement,” says Govender. Unfortunately the household savings performance under each of thee subcategories is abysmal. We certainly aren’t saving enough for retirement.
Gordhan observes: “Savings provide individuals with a decent retirement, a basic right that only one in 10 of South Africa’s pensioners currently enjoy.” And short- and medium-term savings objectives are all too often dropped in favour of consumption expenditure.
Sasi would like to see more South Africans saving for the ‘nice to have’ items rather than borrowing at high interest rates for such purchases. “We should be planning and saving for our holidays rather than adopting a fly now, pay later stance,” says Govender. “We should be saving towards a substantial deposit when considering buying fixed property and we should certainly be saving for our children’s education.”
Why is our household savings rate so poor? There are many contributing factors including consumer behaviour and underlying economic factors. Under the former we list poor consumer attitudes to saving, a propensity for instant gratification and an inability to consider needs beyond the immediate future.
“An entrenched savings culture means South Africans must develop an attitude of saving for major expenses and goals, instead of relying on easy credit and long repayments to purchase whatever luxury good seems desirable at the time,” says Gordhan.
Economic factors include recession, slower than expected post-recession economic growth and unemployment. The recession wreaked havoc with households already struggling with record debt. As many as 82% of households ‘fingered’ recession as one of the reasons they failed to meet their savings objectives in recent years. There is little doubt unemployment is among the most significant obstacles to the country’s long-term wellbeing.
The latest Statistics SA Labour Force Survey confirms a 25% official unemployment number. Gordhan is painfully aware of unemployment’s impact on savings: “An important factor in this equation is the persistence of high unemployment, which means people may not be earning enough income to save, or might have to use up their savings during lengthy spells out of work,” he said. And a growing number of economists list solving unemployment as the cure-all for South Africa’s many socio-economic woes.
Savings, in turn, can reduce unemployment by providing much-needed sources of entrepreneurial development capital. Another obstacle to improved household savings is the lack of transparent and cost-effective savings products. Banks have been under the spotlight on many occasions and have been criticised for high fees.
Despite launching various low-income accounts, the feeling that is costs on these accounts are still too high — in reality a dis-incentive to saving. Recent innovation in the mobile banking space could create further economies of scale, though costs on these platforms are escalating and could ultimately price out low-income savers.
South Africans are acutely aware of their savings shortcomings, but given the pressure on their finances it seems they are powerless to take corrective action. Statistics from the Old Mutual Savings Monitor 2011 suggest the downward spiral will continue.
The survey, which draws from 1 000 South African households in metropolitan areas, points to a decline in savings across all income groups. Only 53% of survey respondents contribute to a pension or provident fund to save for retirement, and the majority say they will defer in favour of cost of living and debt reduction.
Old Mutual’s chief researcher Lynette Nicholson says South Africans’ belief in their ability to manage money has fallen while their satisfaction level with their finances has declined from 6.5 to 5.7 points out of 10. “Old Mutual has identified through this research that consumers are crying out for more knowledge on how to save properly.”
To this end Old Mutual has invested more than R65-million in various financial education initiatives since 2007, including the On the Money financial education programme. Approximately 77 500 people have attended the programme workshops and the Department of Basic Education has incorporated some of the content into the education curriculum.
Sasi agrees that education is a major weapon in the war against poor household savings. “Despite limited funding, Sasi manages to campaign during different times of the year by way of our Teach Children to Save initiative in partnership with the Banking Association of South Africa, the Varsity Literacy Campaign in partnership with the Financial Services Board and our annual Festive Season Saving Campaign,” says Govender.
Savings behaviour and culture is instilled from a young age. Another of the major challenges facing the financial services industry is the poor numeracy and literacy skills among the youth.
Govender believes programmes must push ahead regardless, “Sasi has reached more than 250 000 primary school learners in the last four years through our Teach Children to Save Campaign,” she says.
The organisation is also reaching out to university students to teach them the value of budgeting, managing their finances and avoiding unnecessary borrowing. Savings are an important part of the economic growth equation.
A recent World Bank report concludes that South Africa must increase investment and savings if it hopes to grow the economy and create jobs.
World Bank economists and authors of the report, Sandeep Mahajan and Fernando Im, told reporters: “Modest investment rates in South Africa despite attractive returns, [coupled with] low savings rates despite favourable demographics are [serious] impediments that need to be resolved to achieve the country’s full potential.”
Improved savings will be crucial for creating and sustaining an environment conducive to economic growth and social development.