At a national level, domestic savings is made up of savings at three tiers namely government, the private sector (corporate SA) and individuals. Currently, government is a net spender, detracting from the net domestic savings rate and widening the current account deficit. Households or individuals are also 'dis-savers' at a net level, leaving the private sector as the only sector making a meaningful contribution to domestic savings.
Over the last few decades we have seen a sharp decline in domestic savings from over 20% as a percentage of Gross Domestic Profit (GDP) between 1960 and the 1980’s, dipping to the late teens in the 1990’s and dropping to as low as 13.2% in 2012. Against our international peers, measured on average between 1975 and 2012, SA’s savings rate is close to the bottom of the pile (with China at 42%, Russia 28%, India 25%, South Africa 19% and Brazil 17%). This is significant at a macro-economic level because there is a direct link between savings and economic growth, albeit a bit of a chicken and an egg relationship.
SA is predominantly a consumption-led economy, rather than investment led. At the extreme, this could lead to a debt trap. To achieve sustainable growth we require investment (capital formation). Investment is only achieved through savings – either our own domestic savings or those of foreigners. In recent years we have had a capital formation (investment) rate exceeding our savings rate. We have relied increasingly on foreign flows to fund capital formation. Greater domestic savings would mean less reliance on foreign inflows, provide consumption stability and sustainable growth of the economy. The 'virtuous cycle' of economic development can also be seen in another way: savings funds investment, investment fuels growth and growth in turn leads to a higher savings rate. Research shows that countries with > 6% GDP all achieved savings rates of > 20%.
The current outlook for SA’s economic growth for the short term is pretty bleak (between 1% - 2%), which doesn’t bode well for savers’ ability to save. At a household level, savings reduces vulnerability to economic shocks, provides for a comfortable retirement and smoothes consumption over a lifetime. One of the most frequent responses regarding savings from South Africans is "we cannot afford to save!" which is indeed true for some as research shows that there are a number of factors impacting personal savings.
The ability to save is impacted by country demographics, levels of income, income stability and employment levels. None of these look particularly positive for South Africa. Current unemployment rates are up to 26% this quarter, which is exceptionally high compared to our international counterparts. This impacts income levels and income stability. Our country demographics also don’t play into our favour as we have a very high age dependency ratio (over 50%) meaning we have a small middle aged population caring for the elderly and the youth, also known as the 'sandwich generation'.
Our household debt levels are historically high at 78% of disposable income, making individuals vulnerable to interest rate hikes – a more than likely event in the coming months. Impairment records for active credit consumers is around 45%, which is higher now than in 2009 at the time of the last recession. Furthermore, education and financial literacy also play an important role in the population’s ability to save with the complexity of financial products contributing to the savings dilemma.
Factors impacting the individual’s willingness to save are more complex. Theoretically, in times of uncertainty, people tend to save more to ensure a buffer for 'a rainy day'. On the flip side, the relative ease of access to credit in SA, creates a disincentive to save. Accessibility to retirement funds when changing jobs has also been a deterrent, with many South Africans 'cashing in' on their retirement savings and finding themselves in a predicament at retirement. Recent strides by National Treasury to incentivise savings in the form of tax-free savings accounts could nudge households in the right direction but do not provide a 'silver bullet' solution to our poor savings culture.
Trust also plays an important role. Following the 2008 banking crisis individuals are more cautious about where they invest, often mistrusting financial institutions and the advice they receive and then procrastinating or not saving at all. The myriad of choices, complexity of products and lack of transparency around the savings alternatives and fees also adds to the confusion of which products to choose. The FSB Financial Literacy Report of 2011 shows that most South Africans use basic products such as bank accounts but only 39% are aware of more sophisticated alternatives such as unit trusts. This indicates a huge need for consumer education. In addition, research from OMSI shows that 80% of South Africans in the report would actually like to learn more about how to save. In short, South Africa’s savings culture is in desperate need of revival.