Money saving culture vital for sustainable growth

Speaking to BuaNews at the launch of Savings Month 2008 and Teach Children to Save Campaign, Sanlam Chief Strategist for Financial Sector Developments, Elias Masilela said despite the rising cost of living, South Africans must save.

How much are we saving?

“Last year when we launched Savings Month, the savings rate stood at 15.1%.

“Today, in the first quarter of 2008, we record a savings rate of 13.7% [which includes savings and reinvestment by government, corporations and households].

“In 1994, the economy recorded a savings rate of 16.9%. In 2001, when the South African Savings Institute [SASI] was born, the rate was 15.6%.

“Since then it has increasingly [become] worse.

“The picture at the level of households is even more telling, with rates respectively recording 2.5%, 0.8% and -0.7% as a percentage of disposable income,” said Masilela in his capacity as Chairperson of SASI.

High inflation = high domestic debt

Masilela highlighted that despite rising interest rates, record level crude oil prices and more economic woes on the horizon with petrol well over R10 a litre, domestic credit has gone up.

In 1994, the debt ratio or the amount of a persons salary spent on paying off debt was 55.5%. In 2001 the debt ration had dropped slightly to 52.6%, but has sky rocketed to 78.2% in 2008.

“There is no doubt that with monetary tightening, the debt service costs will become unsustainable for most South African consumers.

“What this means is that if no serious readjustment of people's finances takes place, this will further add to the negative impact on people's savings performance.

“There is no doubt that the campaign to promote saving will experience increasing difficulty, as more and more of people's expenditure baskets become dominated by consumption,” he said.

Teaching children to save

Trying to instil a culture of saving in adults is very difficult, he told BuaNews, adding that if adults have not been saving from a young age, it is unlikely they will start saving now.

Masilela therefore believes it is best to educate the youth about the advantages of putting a little bit of money away at the end of the month, and hence the Teach Children to Save Campaign was born.

He highlighted that in this whole situation, it is the poor that unfortunately need to be saving the most, as they are more exposed and vulnerable to price fluctuations.

“The poor can't just go into a bank and ask for short term financial assistance like we can, they have to use their savings to pay for everything.

“We are also trying to change the mind set of South Africans spending money on education is in itself actually saving money, and is not consumption expenditure.

Factors hampering savings

“Some of the greatest challenges facing us are the rising cost of living, making it increasingly difficult to save, the volatility of the Rand, and peer pressure and influence when it comes to things like cars, clothes and luxuries.

“People should be competing to see who can invest and save the most instead of seeing who drives the latest cars, has the most expensive clothes and goes to the most expensive restaurants,” Masilela said.

Interesting to note, however, is that a study done by SASI and Finmark Trust found poor South Africans are actually saving more than their richer counterparts.

The poor's saving strategy, however, is toward non-traditional instruments such as housing and education for their children he said.

Stabilising oil prices will help

With regard to the current economic climate in South Africa, Masilela believes once global oil prices stabilise then inflation will come down significantly.

“I am a believer in inflation targeting [as is employed by the South African Reserve Bank] and believe that inflation can normalise by 2009 or 2010, depending on certain variables.

“Our two main goals for saving are to reduce the vulnerability and reliance of households on others, giving them far greater bargaining power.

“And secondly, to help the economy as savings are very important for sustainable growth over time,” he said.

South Africans could be facing yet another interest rate hike in August when the Monetary Policy Committee meets again. Reserve Bank Governor Tito Mboweni in June announced a 50 basis point increase in the repo rate, warning of further hikes in coming months.