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COVID-19 special savings report

29 Jul 2020

The past six months have been extremely challenging for South Africans and the South African economy. COVID-19, and the subsequent extended lock-down of society, has disrupted every major component of the country, resulting in a significant contraction of economic activity, a surge in government debt and a sharp rise in unemployment.

The potential saviour for households and businesses in this time? Savings. But where are we as individuals and a country with our savings and what new insights, trends and concerns have cropped up since the pandemic's inception? STANLIB's Economics team, Kevin Lings and Ndivhuho Netshitenzhe share insights on this:

A low savings rate stifles growth and increases the country's vulnerability during a time of crisis. Unfortunately, South Africa's current savings rate is also extremely low by global standards. With gross savings of less than 15% of GDP in 2019, South Africa has one of the lowest savings rates in the world. This rate is far below the world average of 25.1%.

Actually, South Africa's savings rate can be described as structurally weak given that it has not been above 19.0% of GDP since 2000 and has been trending lower for the past thirty years. In contrast, before the 1980s, not only was South Africa's gross savings relatively high, but it was also increasing, peaking at 42.6% of GDP in the first quarter of 1980, up from 26.5% of GDP in Q1 1960.

In fact, during 2018 South Africa's total gross savings averaged a mere 14.4% of GDP, which was a record low, and well down from 18.9% of GDP at the end of 2010. Furthermore, during 2019, the level of savings was little changed, ending the year at only 14.6% of GDP.

Direct impact of low savings on South Africa's economy

Most people do not realise that these abysmal savings figures have a direct impact on our country's financial wellbeing. From a macro-economic perspective, the level of national savings is vital for the successful and sustained development of the country, most especially fixed investment activity as well as job creation.

In South Africa's case, a robust level of economic growth would be around 6% each year on a sustained basis. Under these circumstances South Africa would expect to create roughly 500 000 to 700 000 jobs a year. However, a GDP growth rate of 6% would require that the level of fixed investment remains around 25% to 30% of GDP, up from the current level of 17.4%. In fact, the government's National Development Plan (NDP) set a long-term fixed investment target of 30% of GDP, split between government (10% of GDP) and the private sector (20% of GDP).

In order to make this a feasible objective, South Africa would have to achieve a domestic savings rate of at least 20% to 25% of GDP, from the current level of less than 15%, with the remainder of the savings (5% of GDP) being provided through foreign investment.

This means that over the next few years, the growth in household income would have to persistently exceed the growth in household consumption, while at the same time government would have to bring its fiscal deficit firmly under control, providing room for the private sector to increase investment. At the same time, the level of foreign investment would have to expand on a sustainable basis, even though South Africa's international credit rating has been pushed to below investment grade by all three of South Africa's credit rating agencies. Clearly not an easy task!

Neglect of precautionary savings

Liberty has also noticed a significant lack in precautionary savings in many South African households and businesses – even in a time such as COVID-19, when these are especially life-saving.

Precautionary savings, which is sometimes referred to as 'emergency savings' is when a household or business establishes a pool of savings as a precaution against the sudden and unexpected loss of income or earnings – as unfortunately occurred during the recent severe lock-down restrictions that accompanied the spread of COIVD-19.

With households, a good amount of emergency funds would equate to three months or more of household expenses. A goal of accumulating one month of household expenses over a 12-month period for three consecutive years is not an unreasonable or completely unobtainable goal for many households. The same principle would apply to a business, allowing the company to retain their staff, and vital assets, necessary for the future prosperity of the business.

These savings are especially lacking when one considers what an ideal precautionary investment looks like. That is, funds invested in a low risk investment to allow access to them during a period when financial markets are likely to be weak. The money also needs to be available within days rather than weeks (so utilising a long-term deposit or investment would not be ideal), accessing the funds should not result in some form of penalty for early withdrawal and need to earn an above inflation return.

With all of these traits considered – excluding placing the funds in a bank account or a long-term vehicle – hardly any South Africans have an adequate emergency fund – a frightening thought in the midst of COVID-19.

Foreign ownership of South African government bonds

According to data provided by National Treasury and South African Reserve Bank, as recently as March 2018, foreign investors owned a very substantial and impressive 42.8% of South African government's bonds.  In contrast, local banks owned only 14.4%, while local pension funds had accumulated 25.6%, with insurers, unit trusts and hedge funds owning the rest (17.3%).

However, over a period of just two years, foreign ownership of South African government bonds has plunged to only 30.6% of total bonds (see chart attached), including a decline of 6.6 percentage points since the end of 2019. This is the lowest percentage holding by foreigners in more than eight years! In contrast, banks now own 22.1% of SA government bonds (not necessarily by design), local pension funds 23.2% and insurers, unit trusts and hedge funds a combined 24%. Understandably, this outflow of foreign bond investment reflects the sharp and ongoing deterioration in government finance, which is reflected in the recent credit rating downgrades, South Africa's exclusion from the World Global Bond Index, as well as the stark Supplementary Budget the Minister of Finance presented recently.

While it is sometimes easy to dismiss foreign portfolio investment (bonds and equities) as "fickle", the reality is that foreign portfolio investment has been South Africa's only real source of foreign investment for many years, and in general foreigners were systematically increasing their holdings of South African assets up until March 2018. Without regular foreign investment inflows it will be near impossible for South Africa to fund a meaningful and prolonged economic upswing that includes substantial infrastructural development - partly because SA has an extremely low level of domestic savings even if you include the reprioritisation of a portion of South African pension funds towards infrastructural development.

Ultimately, there are no limits to what the country can achieve by pooling savings and leveraging the financial services industry to service the financial needs of the population. Unfortunately, South Africa's current low level of savings leaves the country, but most especially small businesses and households, much more exposed to possible episodes of turbulence in international financial markets, such as the global financial market crisis or the Covid-19 crisis. This vulnerability won't change if South Africa maintains a very low savings rate.

Let us use this crisis time as motivation to build savings together – and it will save us in the long run. 

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