Opinion: South Africans Must Spend Less, Save More, Take Care Of Micro Economics

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Written by Dana Sanchez

South Africans are spending too much of their household income, not saving enough, and that’s hurting the overall economy, according to a report in Moneyweb by Hanna Ziady.

Promoting household savings holds the greatest prospect for the country’s economic growth, experts said.

South Africans are among the world’s worst savers, Fin24 reported in July. It’s not because South African salaries are low and the cost of living is high. The Chinese earn less on average than South Africans, and manage to save over 50 percent of their gross domestic product. India saves about 30 percent, Brazil around 25 percent, and Australia about 22.5 percent.

South Africans, by comparison, save 16.3 percent of GDP, according to Moneyweb.

South Africa’s low rate of household savings is holding back its economic growth rate, according to research from U.K.-based Investec, a specialist banking and asset management group, and the Gordon Institute of Business Science (GIBS) — a leading South African business school.

Released on Wednesday, the Investec GIBS Savings Index shows that 90 percent of South Africa’s economic growth over the past 20 years can be explained by growth in consumer and government spending.

“Neither of those are sustainable and neither of those contribute to the development of productive capability. The healthiest economic growth is investment fed and export led,” said Dr Adrian Saville, chief strategist at Citadel Wealth Management and one of the authors of the index.

At 16.3 percent of gross domestic product, South Africa’s savings rate translates into an investment rate of 18.7 percent which will fund an economic growth rate of just 2 percent, according to the Investec GIBS Savings Index.

If South Africa wants to achieve economic growth of 5 percent, it needs an investment rate closer to 28.3 percent, according to the index.

Among 39 countries whose economic activity accounted for more than 95 percent of world output between 2001 and 2010, the average investment rate had a 73 percent correlation with the average economic growth rate.

“The single most important explanation for economic growth in any economy is investment spending. Savings play a pivotal role in improving economic growth through funding investments,” Saville said.

Botswana, Brazil, China, Indonesia, Japan and South Korea are among 13 aspirational countries or “savings stars” that achieved economic growth of more than 7 percent for 25 years in a row. The Savings Index established common factors among them that explain high and sustained economic growth.

Investment ranks high among them. Other attributes include macro-economic stability, a competent government, and outward economic orientation.

The Savings Index assesses South Africa’s performance against these countries based on three pillars — the size of its existing savings pool, the rate at which new savings are flowing in and environmental factors that influence savings.

Combining the scores from each pillars, South Africa achieves a total score of 63.4, where 100 represents a passing score for national savings.

“We are two thirds of the way to being aspirational superstars,” said Saville, who argued that South Africa is walking “straight past a yawning opportunity” to convert the 2 percent economic growth that it has into the 5.4 percent it talks about.

South Africans are “collectively responsible” for saving, which in turn leads to investment and economic growth. “If you want economic growth, stop spending and start saving,” Saville said.

Unfortunately, South Africa’s low savings rate is affected by high unemployment and low growth in incomes and productivity.

“The promotion of domestic savings – especially among households – holds the greatest prospect for the promotion of elevated economic growth,” said René Grobler, head of Investec Cash Investments.

By reducing consumption to bolster savings, attracting non-resident savings to promote portfolio investment and attracting foreign direct investment, South Africa can escape the “savings trap”, Grobler said.

“We sit in a relatively undemocratic landscape where information is asymmetrical and the cost of access is high, so we have headwinds rather than tailwinds to savings behavior,” said Saville, calling on industry to establish “affordable and accessible savings channels”.

Olano Makhubela is chief director of financial savings and investments at South Africa’s National Treasury. The government’s strategy to promote a savings culture involves both “nudging” consumers to save (by providing tax incentives), as well as compelling them to do so through compulsory annuitisation of retirement savings, Makhubela told Moneyweb on the sidelines of the index launch.