By Felicity Duncan
As Cyril Ramaphosa establishes his policy war room and considers his miles-long To Do list, he’s probably focusing on major priorities like Eskom. But I’d like to humbly submit that he should also make time for something that may not seem like a big deal but is: South Africa’s zero household savings rate.
For the last few years, South African households have been saving negative amounts of money – they’ve been spending more than they earn and making up the difference with debt. The 2018 household savings ratio (HSR) – household disposable income less household consumption expenditure, plus the change in net equity of households in pension funds, as a % of disposable income – was essentially zero, and the years before that weren’t any better (see chart).
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This compares unfavourably to a Chinese HSR of around 37%. Heck, even Mexico managed an average HSR of around 11% between 2003 and 2016 (the most recent period data is available for).
This low HSR is bad news for SA’s growth prospects. For the economy to grow, South Africa needs massive amounts of capital that can be invested in businesses, plants, and equipment that can, in turn, produce goods and services and create jobs.
In most countries, domestic savings have been a core source of the capital needed to spark growth. China, for example, used its large pool of domestic savings to help jumpstart its manufacturing boom.
Domestic savings come from three places: households, private businesses, and government. In SA, the government is not a net saver, which is to be expected for a country at SA’s level of development.
Many SA businesses, on the other hand, are saving. Unfortunately, they are not investing those savings in productive capacity, probably because they’re worried about the prospects for growth and for the security of their investments. There’s no easy way to change this other than boosting economic growth, which requires capital in the first place.
Thus, we’re left with household savings. Unfortunately, without a growing pool of household savings, South Africa effectively does not have the option of using domestic capital to fuel growth. This means that the country will have to rely on foreign capital.
This isn’t necessarily bad – China has made a good business out of attracting foreign direct investment (FDI). The catch is that FDI is much flightier than domestic savings and the demands of foreign investors – in terms of returns, currency issues, and so on – are often tougher. In addition, reliance on FDI means that a lot of the surplus generated by capital investment will leave the country – South Africans may get jobs, but the profits will leave SA. Thus household savings would be a much cheaper form of capital for the country and Ramaphosa should be expending almost as much effort on boosting the HSR as he is on wooing foreign capital.
Now, SA’s savings rate is low for fairly obvious reasons.
First, household income is low, and it hasn’t been growing in real terms – few households are seeing income growth that keeps pace with inflation. Even though inflation is contained at around 4.5%, the slow growth in income means that most households are actually getting poorer over time. This is especially true for those on the lower end of the income scale, whose biggest costs are food and transport – prices for those essentials have been rising much faster than overall inflation. With falling or stagnant real incomes, many South Africans simply don’t have much capacity to save.
Second, many aspects of South Africa’s tax and savings policies dis-incentivise household savings. In addition to VAT, stock market transactions are subject to taxes including a securities transfer tax and an investor protection levy. Dividends are taxed at 20% and investors also pay capital gains taxes. Admittedly, tax breaks on retirement savings remain intact (although they’re losing ground to inflation), and there are tax-free savings and investment accounts available (the interest on these is tax-free too). However, SA financial products remain relatively costly, in terms of fees, compared to many other markets. And relatively low returns on investments for the last few years have further turned people off investing.
These are tough problems to solve and it’s no real surprise that Ramaphosa is aiming at the lower-hanging fruit of piggybacking on foreign households’ savings by attracting FDI. In the longer run, however, SA needs a reliable, low-cost source of domestic capital and that’s going to have to come from domestic savings. The new government would do well to spend some time thinking about what it will take to make South Africans feel confident enough to start saving and investing at home.
