Download savings: a macro perpespetcive - South African Savings Institute

SAVINGS: A MACRO PERSPECTIVE
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
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South Africa’s Experience
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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
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Long Term Trends
Declining Savings Ratio
Rising Investment Ratio
Increasing dependence on foreign savings
Deteriorating sovereign balance sheet
Not sustainable in the long run
Gross Domestic Savings (% of GDP)
5
Saving vs. Investment (% of GDP)
6
Who are the savers?
 Corporates
 Households
 Government
7
Savings rates (% of GDP)
8
How has government been doing?
9
Government dissaving had been eliminated
10
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
11
What to do about government savings
 Contain current expenditure: wage bill,
transfer payments
 Increase capital expenditure: address
capacity
 Continue with budget surpluses
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How have households been doing?
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Household savings rate (% of GDP)
14
Household Saving (% of disposable income)
15
Reasons for poor household savings
 Savings = f (income, propensity to save)
 Low disposable income growth
 Low
economic/ employment growth
 Rising tax burden
16
Growth in real personal disposable income
17
Personal income tax (% of disposable
income)
18
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
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Household debt (% of disposable income)
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What to do about household savings?
 Faster growth in disposable income
 Reduce income taxes, increase consumption
taxes
 Create a savings culture
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
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Discipline
Sacrifice
Financial independence
Taking a long-term view
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How have corporates been doing?
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Corporate saving (% of GDP)
23
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?
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Corporate tax (% of GDP) 2005
1
Estonia
1,4
2
Germany
1,8
11
Brazil
2,3
22
China
2,9
25
India
3,2
28
Ireland
3,4
37
South Korea
4,1
43
Australia
5,3
44
Malaysia
5,3
50
South Africa
6,4
25
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
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Saving,Investment and Growth in South
Africa
Percentage
Selected South African ratios
8
7
6
5
4
3
2
1
0
-1
-2
-3
40
35
30
25
20
15
GFCF to GDP
Gross saving to GDP
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
10
GDP growth
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SA and the rest of the world
Percentage
Gross national savings, in percent of GDP
40
35
30
25
20
15
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
10
South Africa
World
Advanced economies
Other emerging market and developing countries
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SA and the rest of the world (cont.)
Percentage
Gross national savings, in percent of GDP
45
40
35
30
25
20
15
South Africa
Developing Asia
Euro region
Africa
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
10
Asian NICs
29
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?
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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?
31
Government Finances
%of GDP
4
General government saving
2
0
-2
-4
-6
34
2004
2002
2000
%of GDP
General government current expenditure
32
30
28
26
24
22
32
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
20
1980
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
-8
Government Investment
8
% of GDP
General government investment
7
6
5
4
3
2
1
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
0
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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
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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
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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
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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
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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
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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
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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)
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THANK YOU
“To save or to perish: that is the choice!”
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CONTACT DETAILS
Mr. Ahmed Jooma
Chief Director: Financial Services
National Treasury of South Africa
(L)012 315 5706
(M)082 938 4669
[email protected]
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