Household savings improve while corporate savings deteriorate

"South African households have shown an improvement in their ability to save," says Andrew Bradley, chairman of the SASI, "This is important for economic growth, because household saving contributes to domestic saving which helps to finance the bulk of capital formation in South Africa."

SASI is a non-profit organisation that promotes savings in South Africa. The organisation recently released the results of the ipac/IDC Savings Barometer for the fourth quarter of 2002 which shows that households experienced a slight increase in their ability to save. The increase can be attributed to a higher household disposable income, coupled with a slowdown in spending.

Bradley explains that saving is necessary for growth in the economy. He says, "Creating prosperity and jobs requires investment. Every factory, shopping centre or engineering project requires investment capital to convert it from an idea into reality. The more South Africans save, the greater the pool of investment capital we create. The more investment capital available, the more potential there is for the economy to grow and create jobs."

Household saving on average has deteriorated over the last decade. In the eighties gross household saving as a percentage of GDP was 6.3% on average, while in the nineties it was down at 4.2%. We may be witnessing a change in this trend now. Says Johan Prinsloo, executive director of the SASI and senior economist at the Reserve Bank, "What we find very encouraging is that the outlook for further improvement in the household savings environment looks positive."

The downward adjustment to personal income tax rates in the 2003/2004 budget means that households have more disposable income this year than last year. In addition, the recent drop in the level of inflation - on account of the revisions in the calculation of the consumer price index by Statistics South Africa and the general slowdown in the increase in the price of goods and services - will result in inflation expectations being lowered. This is positive, and it has already led to a cut of 1.5% in the prime overdraft rate with further cuts expected.

"Household saving should improve in a lower inflationary environment, but consumer behaviour is difficult to predict," says Johan Prinsloo. He explains that on the one hand, a lower inflationary environment should encourage people to save since the threat of sharply rising prices in the economy is low. On the other hand, lower interest rates could provide a disincentive to save because of the lower rates earned on deposits at the banks, and the lower concomitant cost of debt. Other forms of investment like equities should however benefit from lower interest rates and we could see money being invested in asset classes other than cash.

Prinsloo cautions that although the improvement in household saving bodes well for economic growth, it will need to be supported by an improvement in both corporate and government saving, in order to have the desired impact on growth.

The savings environment for the corporate sector deteriorated again in the fourth quarter of 2002, following a decline in the quarter before, according to research recently released by South African Savings Institute (SASI), a non-profit organisation that promotes savings in South Africa.

Although this is disappointing, SASI expects to see a reversal of this trend later in 2003 following the recent interest rate cuts. Overall company profitability is likely to improve in a lower interest rate environment and where balance sheets are geared, lower interest will have an even greater impact on profits.

"Domestic saving is an important element that can help economic growth, since private and government saving provides the funds to finance capital formation. Domestic saving is particularly important in an environment where access to foreign saving remains unpredictable," says Johan Prinsloo.

According to SASI, in the fourth quarter of 2002, companies encountered a fall in their total real income, primarily because of the stronger rand and higher costs. Business confidence was lower over this period, while the sustained high levels of growth in the remuneration of employees led to higher unit labour costs. The stronger rand also made exporters less competitive in international terms and the resultant fall in profitability led to the deterioration in the corporate savings environment over the quarter.

By contrast, total gross savings in South Africa increased from a ratio to GDP of 15.7% in the third quarter of 2002 to 16.8% in the fourth quarter of 2002 as a result of an improvement in the ratio of corporate and household saving. Says Prinsloo, "The corporate sector remained the largest contributor to the savings ratio, saving the equivalent of 11% of the gross domestic product during the year, and contributing 69% of total domestic saving. This was driven by higher operating surpluses that came about as a result of the growing economy and the windfalls reaped from the sharp deterioration of the rand at the end of 2001."

Saving in the corporate sector is the balancing item between the income and expenditure accounts after the current receipts and payments of companies have been taken fully into consideration. It could also be described as the retained income of private and public incorporated financial and non-financial enterprises. As a result any improvement in profits that is not paid out to shareholders will directly impact the corporate saving figure for the country.

The overall South African savings environment is monitored by means of the ipac/IDC Savings Barometer, which measures the extent to which the macro-environment is conducive to saving in the household, corporate and government sectors. The Savings Barometer does not measure actual savings, but provides a useful yardstick against which the actual level of savings can be assessed.

The first ipac/IDC Savings Barometer was released in April 2001 at the official launch of SASI. At the launch, Minister of Finance, Trevor Manuel said that: "Without saving, there is nothing to invest, and therefore, few opportunities for economic growth and development."

Says Prinsloo, "SASI aims to make a significant contribution to sustainable economic growth in South Africa through the development of vibrant savings culture that is driven by a financially literate population."`