JOHANNESBURG – South Africa’s poor rate of household savings is materially holding back its economic growth rate, according to research from Investec and the Gordon Institute of Business Science (GIBS).
At 16.3% of GDP, the country’s savings rate translates into an investment rate of 18.7% (explained by a slight uplift from foreign investment), which will fund an economic growth rate of just 2%, the Investec GIBS Savings Index finds.
If South Africa wants to achieve economic growth in the order of 5%, as envisaged in the National Development Plan (NDP), it needs an investment rate closer to 28.3%, according to the index.
Released on Wednesday, the Savings Index reveals that 90% 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.
Among 39 countries whose economic activity accounted for more than 95% of world output between 2001 and 2010, the average investment rate had a 73% 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,” said Saville.
Based on 13 aspirational countries or “savings stars” – which achieved economic growth of more than 7% for 25 years in a row – the Savings Index establishes a small set of common ingredients that explain sustained and elevated economic growth.
Chief among these is a high rate of investment. Other attributes include a competent government, macro-economic stability and outward economic orientation.
The countries range from Brazil and Botswana, to South Korea, Japan, China and Indonesia.
The Savings Index then assesses South Africa’s performance against these countries based on three pillars, namely, the extent of its existing savings pool, the rate at which new savings are flowing into the pool and the environmental factors that influence savings.
Combining the scores from each of these three pillars, South Africa achieves a total score of 63.4, where 100 represents a pass mark 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% economic growth that we’ve got into the habit of delivering into the 5.4% that we write about.
Saville said that 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 commented.
Higher household savings crucial
Unsurprisingly, the environmental factors that have the greatest negative impact on South Africa’s savings rate is sluggish growth in per capita incomes, slow growth in productivity and entrenched high unemployment.
“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 behaviour,” said Saville, calling on industry to establish “affordable and accessible savings channels”.
Speaking to Moneyweb on the side-lines of the launch of the index, chief director of financial investments and savings at National Treasury, Olano Makhubela explained that government’s strategy to promote a savings culture involves both “nudging” consumers to save (by providing tax incentives for example), as well as compelling them to do so through, for example, the compulsory annuitisation of retirement savings.
Makhubela said that Treasury welcomes the Savings Index and will track it closely.