Author Sophie Kinsella was on to something when she said “There’s something special about saving up for a special treat, bring back the piggy bank”. In this article, we look at the straw that broke the piggy bank and how savings have changed since 1994.
Global savings trends are fragmented, with developing countries generally exhibiting higher growth rates than their developed counterparts. South Africa has however underperformed relative to its emerging market peers with a gross saving rate of 16% of GDP in 2009. This compared to China’s savings rate of 52%, India’s of 37% and Russia’s of 22%.
A GLOBAL PERSPECTIVE ON SAVINGS
Countries with high debt-to-GDP ratios have been the least successful in growing savings, so it comes as no surprise that developed countries are finding it increasingly difficult to grow their savings pool.
A World Bank report shows that average domestic saving in developing countries stood at 34% of their GDP in 2010, up from 24% in 1990, while their investment was around 33% of GDP in 2012, up from 26%.Together with higher growth rates in developing countries, this has resulted in developing countries’ share of global savings growing to 46%, nearly double its level in the 1990s. Developing countries are expected to continue with this trend over the next two decades. Asian consumers have the largest monthly inflows as well as the largest savings pots.
IS SOUTH AFRICA’S SAVINGS POT GROWING?
While the table below shows a steady decrease in gross domestic saving over the last three decades, a useful exercise is to examine key structural factors that have resulted in lower savings, in order to get a clearer picture of the South African savings landscape.
SA GROSS DOMESTIC SAVING RATES
HIGH UNEMPLOYMENT
When the unemployment levels decrease the savings pool will, on average, grow. The official unemployment rate in 1994 was approximately 20% as recorded by Statistics South Africa (Stats SA) and the most recent Labour Force Survey (Q4 2013) reported unemployment at 24.1%.
Between 1995 and 2003, employment increased by approximately 1.25% annually, while the labour force grew by 4% annually. The gains were largely in informal employment, whereas formal employment fell by 1.25% annually over the same period. South Africa’s unemployment rate remains exceedingly high by global standards, and this is not helping us in improving our culture of saving.
LOW INCOME LEVELS
A rise in per capita income may lead to a higher savings rate in SA. Average per capita income grew by 30% between 1994 and 2013 with increased black participation in the economy and a transformation of the middle class. While this may have been supportive for higher gross domestic savings, the South African minimum wage range of R7.71 – R11.48 per hour worked is still significantly low by global standards and will continue to be a drag on the savings prospects of the country.
SKEWED INCOME DISTRIBUTIONS
Stats SA data shows that South Africa’s level of income inequality increased between 1993 and 2008. This inequality increased both across and within the race demographics. The informal sector has created more employment than the formal sector, thus widening income inequality and the gap between the first and the second economy. The jobs created by the informal sector are of a low value-adding nature and will generally result in significantly lower incomes, while the formal sector makes the greater contribution to wealth creation and GDP.
POPULATION DEMOGRAPHICS
Masson, Bayoumi and Samei, 2008 found that the age structure of a country’s population has a significant influence on savings. If a high proportion of the population is of working age – especially if at peak earning years – then the economy should have a high rate of private savings, as workers provide for their retirement. Conversely, when this cohort reaches retirement age and dissaves, then the aggregate savings rate should decline.
A country’s dependency ratio is a ratio of dependants not in the labour force (typically age younger than 15 years and older than 64 years) to those in the labour force. South Africa’s dependency ratio has been high since 1994, but is expected to steadily decrease throughout time, which should support higher savings in the medium to long-term.
UNPACKING THE POPULATION
HOW HAVE SOUTH AFRICAN’S BEEN BEHAVING?
A MORE OPEN FINANCIAL SECTOR
South Africa has opened the participation in its financial sector to a large extent over the past decade. Banks and building societies have considerably expanded their credit to households for housing finance and consumer credit.
FINANCIAL INCLUSION IMPROVING
Statistics from the South African Reserve Bank show that at the household level, savings as a percentage of disposable income decreased from 2.8% in 1994 to 0% in 2013 – clearly reflecting an increase in household debt. The ratio of household debt to disposable income increased from 55.5% in 1994 to 75.8% in 2013.
A VIEW ON BANKING
WHAT DRIVES THE USE OF OTHER FORMAL (NON-BANKING) PRODUCTS?
GOVERNMENT – THE CONSUMER ADVOCATE
Government has played a significant role in protecting consumers and driving an economically and financially inclusive economy. Some key regulations that have focused on consumer protection that have been brought to the fray in recent years are:
- Introduction of the Ombud system
The Ombud’s role is to resolve disputes between financial services providers and their clients in a procedurally fair, informal, economical and expeditious manner.
- Financial Advisory and Intermediary Services Act
Regulates the rendering of certain financial services and intermediary services to clients.
- The National Credit Act
Regulates the provision of credit to consumers. Its task is to carry out education, research, policy development, registration of industry participants, investigate complaints and ensure enforcement of the Act.
- Consumer Protection Act
The new Consumer Protection Act (CPA) sets a high standard for the protection of consumers. It establishes a single and comprehensive framework for consumer protection.
- Treating Customers Fairly
The initiative proposes a consistent market conduct framework across the financial services sector requiring firms to incorporate the fair treatment of customers at all the stages of the product life cycle, including the design, marketing, advice, point-of-sale and after-sale stages.
FILLING THE PIGGY BANK
Sub-Saharan Africa’s investment and savings rates will be steady due to robust labour force growth. It will be the only region to sustain growth in its saving rate in a scenario of moderate financial market development, since aging of the population will not be a significant factor.
The SA Government is cognisant that we are falling behind our peers and are taking certain steps to address this situation.
The recent Budget Speech by Minister Pravin Gordhan highlights some key government initiatives that will be supportive of higher savings, employment, financial inclusion and higher growth.
- Treasury will this year introduce a new top-up retail savings bond, allowing for regular deposits into a government retail bond. It will also be accessible to community savings groups, such as stokvels.
- Parliament passed legislation to improve governance over pension and provident funds, and to align the rules and tax treatment of pension and provident funds. Also, included in the budget is the introduction of tax-exempt savings accounts, aimed at encouraging household savings.
- The other way to increase the national savings rate is to increase the “catchment area” for investments and savings. The budget speech speaks of specific plans to cover the six million employed South Africans who currently do not enjoy access to an employer-sponsored retirement plan. “We need to move progressively towards a mandatory system of retirement savings for all employed workers”, says the Minister.
- The regulators have reached an agreement with the Association of Savings and Investment of South Africa on a way forward to reduce the level of charges for retirement savings products.
- Government will expand its employment programmes over the next three years and continue to support job creation by the private sector. It also proposes to increase support and tax relief for entrepreneurs and small businesses.
- Amendments will be made to the venture capital company tax regime, and the rules related to access to foreign capital will be eased to enhance support for entrepreneurial development.
- Capital spending is the fastest-growing component of expenditure, and is set to exceed inflation by over 4% a year.
For South Africa, the journey of a thousand miles begins with one rand. The progress made in the last 20 years should not deter the country on its journey to improve the lives of its citizens through higher growth and employment, robust regulatory structures and a fundamentally sound savings culture.
