SAVINGS: A MACRO PERSPECTIVE

1. SAVINGS: A MACRO PERSPECTIVE

2. Determinants of savings • Income • Social Attitudes • Financial Institutions for safe deposit keeping • Banks • Insurance and Pension funds • Building Societies • Other Institutions • Rate of return versus cost • Inflation • Large consumption and investment expenditure needs

3. South Africa’s Experience • Rising marginal tax rates • High rates of inflation over a long time • Government dissavings • Low external savings – sanctions • Periods of negative interest rates • Skewed income distributions • Rising marginal propensity to consumer • Financial liberalistaion • Credit financed consumer spending • Low income levels/unemployment • Culture – community ties as substitute for formal savings

4. Long Term Trends Declining Savings Ratio Rising Investment Ratio Increasing dependence on foreign savings Deteriorating sovereign balance sheet Not sustainable in the long run

5. Gross Domestic Savings (% of GDP)

6. Saving vs. Investment (% of GDP)

7. Who are the savers? • Corporates • Households • Government

8. Savings rates (% of GDP)

9. How has government been doing?

10. Government dissaving had been eliminated

11. Reasons for poor government savings • Government savings = Current income minus current expenditure • Current expenditure too high • Military expenditure • Salaries and wages • Social grants • Capital expenditure too low • Lack of long-term vision • Priority of consolidation • Capacity constraints

12. What to do about government savings • Contain current expenditure: wage bill, transfer payments • Increase capital expenditure: address capacity • Continue with budget surpluses

13. How have households been doing?

14. Household savings rate (% of GDP)

15. Household Saving (% of disposable income)

16. Reasons for poor household savings • Savings = f (income, propensity to save) • Low disposable income growth • Low economic/ employment growth • Rising tax burden

17. Growth in real personal disposable income

18. Personal income tax (% of disposable income)

19. Reasons for poor household savings • Savings= f (income, propensity to save) • Low disposable income growth • Rising tax burden • Low economic/ employment growth • Low propensity to save • Lack of confidence in the future • High inflation: “buy before prices rise” • Financial deregulation plus asset price inflation

20. Household debt (% of disposable income)

21. What to do about household savings? • Faster growth in disposable income • Reduce income taxes, increase consumption taxes • Create a savings culture • Discipline • Sacrifice • Financial independence • Taking a long-term view

22. How have corporates been doing?

23. Corporate saving (% of GDP)

24. Reasons for poor corporate savings • Corporates save to reinvest: balance sheet optimisation • Require profitable investment opportunities • Relatively high cost of capital • Labour market inflexibility • Relatively high corporate taxes • Low economic growth • High existing market shares • Lack of export opportunities • Lack of entrepreneurial vision? • Lack of confidence in the future? • Short-termism: share buy-backs, special dividends?

25. Corporate tax (% of GDP) 2005

26. What to do about corporate savings? • Create profitable business opportunities • Reduce cost of doing business • Create positive business environment, e.g. regulation • Encourage competition • Reduce corporate taxes • Provide well designed incentives

27. Selected South African ratios Percentage 40 8 7 35 6 5 30 4 3 25 2 1 20 0 -1 15 -2 10 -3 1988 1990 1992 1994 1996 1998 1986 2000 2004 1980 1982 1984 2002 GFCF to GDP Gross saving to GDP GDP growth Saving,Investment and Growth in South Africa

28. Percentage Gross national savings, in percent of GDP 40 35 30 25 20 15 10 1986 1988 1990 1992 1994 1996 1982 1984 2004 1980 1998 2000 2002 South Africa World Advanced economies Other emerging market and developing countries SA and the rest of the world

29. Percentage Gross national savings, in percent of GDP 45 40 35 30 25 20 15 10 1986 1988 1990 1992 1994 1996 1982 1984 1998 2004 1980 2000 2002 South Africa Euro region Asian NICs Developing Asia Africa SA and the rest of the world (cont.)

30. Are we facing a crisis? • Do savings alone drive growth? • Is this the only relationship we should worry about? • Household vulnerability • Can we finance the growing current account deficit? But • We want higher investment. • What are the funding options?

31. How have we responded? • Reduced government dissaving • Emphasis placed on capital expenditure • Income tax relief for saving • Ambiguous • Stable macroeconomic framework • Higher growth levels • Low inflation • Growth enhancing micro reforms • BEE • Deal with high dependency ratios and underutilisation of resources • Comprehensive Retirement fund review • Special initiatives like: • Retail Bond • Third tier and dedicated banks legislation • Post Bank restructuring?

32. Government Finances

33. % of GDP General government investment 8 7 6 5 4 3 2 1 0 1988 1990 1992 1994 1996 1998 2004 1986 2000 2002 1980 1982 1984 Government Investment

34. Importance of partnership • Key objectives • Access to basic financial services • Developmental financial institutions • Cooperative banks • Dedicated banks • Deal with discrimination • Promote savings culture • Financial Sector Charter

35. Importance of partnership • Financial sector charter commitments • Reduction in costs to promote access • Promoting a transformed, vibrant, and globally competitive financial sector • Improving control • Human resource development • Procurement • Social investment

36. Major challenges • Dichotomous nature of financial sector • Race • Geography • Income levels • Institutionalised (Redlining)‏ • Growth in incomes • Economic performance • Employment • Change in institutional set up • Leadership of the private sector • Not legislative • Will have to be technologically driven • Reduction of dependency ratios through empowerment • Education

37. Premise for Government policy • Savings increase with rising income and profitability levels (consumption function)‏ • Increase in incomes dependent on growth • High productivity and competitiveness (+ve)‏ • Insufficient reinvestments • Low participation rates (-ve)‏ • Concerned about high unemployment

38. Implications of poor domestic savings • Higher cost of capital • Low investment • Increased fiscal costs and reduction in social and economic delivery • Poor growth • Increased poverty • Household vulnerability

39. Is it Government’s responsibility? • Fundamentally - YES! • Influence cannot be direct • However, private sector has a role to play, it cannot be an observer • In particular household sector • managing consumption patterns

40. Role of Government in summary • Reducing Government dissavings • Improving the quality of the deficit • Increasing capital expenditure • Better service delivery • Potential to undertake countercyclical fiscal policies • Reducing costs of capital • Reducing taxes to increase disposable income and reinvestable funds • Enhancing growth • Higher investment • Increased competitiveness • Higher employment (reduce dependency ratio)‏

41. THANK YOU“To save or to perish: that is the choice!”

42. CONTACT DETAILSMr. Ahmed JoomaChief Director: Financial ServicesNational Treasury of South Africa(L)012 315 5706(M)082 938 4669a.jooma@treasury.gov.za