SA's savings shortage

IN ALL government's economic policy documents, savings hardly rate a mention. Yet the fast-growing Asian economies that SA wants to emulate have much higher saving rates than SA. The question arises whether SA should do more to encourage saving, and how?

What many people don't realise is that savings in the national accounts don't refer only to individual  or household savings. The government and the corporate sector also contribute to or subtract from savings.

Together, the three sectors produce the savings which finance fixed capital formation, or capital expenditure (capex). In the national accounts, savings equal capex plus the current account balance.

If a country doesn't have enough of its own savings to finance capex, it needs foreign savings or foreign capital inflows to help it do so. This is the situation that SA finds itself in.

The ratio of total fixed capital formation relative to gross domestic product (GDP) was 18.7% in the first quarter of 2011, while savings made up 16.3% of GDP. In China, the savings rate is more than 50% of GDP and in India between 30% and 40% of income.

In SA in the first quarter, savings decreased from 17.9% in the fourth quarter of 2010 GDP to 16.3% in the first quarter of 2011.

The lower savings in the first quarter resulted from a decline in corporate saving alongside an improved savings performance by government, while households maintained their saving level. 

The Reserve Bank's Quarterly Bulletin says as a result of the lower saving ratio in the first quarter of 2011 about 15.8% of the country's capital formation was financed via foreign capital, higher than the 5.2% share in the fourth quarter of 2010 and the 14.6% share in 2010 as a whole.

The bulletin says general government - all three tiers - dissaved less in the first quarter. Dissaving occurs when the government uses the nation's savings to pay for recurrent spending, such as civil servants' salaries, instead of using them for capex.

China should save less, says US

The lower dissaving was a result of higher revenues. Dissaving by general government as a percentage of GDP improved from 0.9% in the fourth quarter of 2010 to 0.3% in the first quarter of 2011.

Gross savings by the corporate sector declined from 16.9% of GDP in 2010 to 15% in the first quarter. The drop in corporate saving reflected weaker profitability growth, and a sharp rise in dividend payments in the first quarter of 2011.

Savings by the household sector as a percentage of GDP remained at a level of 1.5% in the first quarter, compared with the fourth quarter of 2011. This was consistent with the broadly similar rates of increase in households' consumption expenditure and disposable income.

In other words, households didn't dip into their savings to finance consumption. However, household savings are at a very low level indeed.

In countries where savings are less than capex, the country runs a current account deficit. In countries such as China, where savings massively exceed capex, the country runs a big current account surplus.

Countries with a savings and current account surplus are referred to as surplus countries. The US is putting pressure on China in particular to save less and reduce its surplus. The US wants China to stimulate private consumption.

SA had more than enough savings coming in from outside the country (foreign capital inflows) to finance its capex in the first quarter. No less than R55.1bn flowed into the country in the first quarter.

But the savings shortage shows just how vulnerable SA is to the vagaries of foreign investor sentiment. The country wouldn't be able to spend more on fixed capital formation if foreign sentiment weren't bullish enough to produce more foreign capital inflows.

It's difficult to see how SA will be able to raise its saving rate without damaging economic growth. Interest rates are a factor in how much people save, and higher interest rates will be detrimental to economic growth in the short term.

There's also no guarantee that just because a country has high savings, it will have high capex. It may just turn into a low-growth, surplus economy.

However, we have to bear in mind that SA's dependence on foreign capital is too high. If a happy medium could be found, where SA saves more and invests more and consumes relatively less, that would be the best road for the country. At the very least, government dissaving should be eliminated.

 - Fin24