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South Africa’s flow of savings needs to almost double if the country wants to achieve its growth objectives of between 5% and 5.5%, according to the Investec Gibs Savings Index, a newly launched quarterly barometer that aims to increase awareness on the importance of savings in driving the economy.
The domestic savings rate has declined steadily over the last 50 years from an average of just more than 24% between 1960 and 1990, to 16.5% from 1991 to 2014, and just 16% over the last decade. In comparison, China’s savings rate is at around 40% of GDP.
For the country to achieve high, inclusive economic growth and sustained development, it is a necessary condition that the country escapes its low savings trap, the researchers say.
“China is not a miracle; miracles are things you can’t explain. China has achieved 10% economic growth in the last 15 years because they save 40% of their income. Remember the number for South Africa is 16%, so if you want 10% economic growth, stop spending and start saving,” says Adrian Saville, professor in economics and competitive strategy at Gibs and chief strategist at Citadel, and one of the authors of the index.
Obstacles to saving
While 5.5% is a realistic growth target for SA, current savings rates are too low to fund the rates of investment that would be required to achieve the targeted growth rates, Saville says.
The reality is that investment spending can be funded only out of savings, and while this can come from domestic funds and/or foreign capital flows, the evidence shows that domestic saving, particularly household saving, is the most functional, the report states.
Ideally, economic growth should be driven by investment and exports, says Saville. “The South African story, sadly, is the exact opposite. Nine tenths of SA’s economic growth over the last 20 years is explained by growth in consumer spending and government spending. Neither of those are sustainable and neither of them contribute to the development of productive capability.”
The three main obstacles to higher savings are sluggish growth in per capita income, slow growth in productivity, and the high unemployment rate, the report states.
The index shows that even though SA’s GDP per capita grew over the past two decades, its growth rate still lags behind emerging-market peers such as Mexico, Indonesia, Nigeria, Turkey, Brazil and China. Saville says this measurement indicates that SA’s standard of living is improving, but not as rapidly as in many other emerging economies.
How to fix it
The researchers have identified three ways for SA to escape the “savings trap”:
- Reduce consumption to promote savings;
- Attract non-resident savings to promote portfolio investments; and
- Attract foreign direct investment.
However, the promotion of domestic saving, especially among households, holds the greatest prospect for the promotion of elevated economic growth, it said.
From a policy perspective, attention should be given to promoting financial literacy; substituting access to credit with vehicles that promote savings; creating greater incentives to save; and improving productivity and incomes and reducing unemployment.
Gerald Mwandiambira, acting CEO of the South African Savings Institute, says a collaborative effort between government and business is needed to improve financial literacy levels and encourage people to save more.
Initiatives such as the launch of tax-free savings accounts and 13th cheques for employees, for example, are helpful to encourage saving.
“South Africans tend to say they are too poor to save. However, when you look at their consumption numbers, those are not consumption numbers of a poor country, those are consumption numbers of a country that has great throughflow of money,” says Mwandiambira.
René Grobler, head of Investec cash investments, says cultivating a culture of saving will boil down to financial literary, especially from a young age. “It’s not about basic education necessarily, it’s about people’s understanding of finance, which leads to an understanding of credit, appetite for credit and whether you would rather save or understand vehicles in which to save in,” she says.
This article originally appeared in the 11 February 2016 edition of finweek. Buy and download the magazine here.
