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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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determinants of savings
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
south africa s experience
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
long term trends

Long Term Trends

Declining Savings Ratio

Rising Investment Ratio

Increasing dependence on foreign savings

Deteriorating sovereign balance sheet

Not sustainable in the long run

who are the savers
Who are the savers?
  • Corporates
  • Households
  • Government
reasons for poor government savings
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
what to do about government savings
What to do about government savings
  • Contain current expenditure: wage bill, transfer payments
  • Increase capital expenditure: address capacity
  • Continue with budget surpluses
reasons for poor household savings
Reasons for poor household savings
  • Savings = f (income, propensity to save)
  • Low disposable income growth
    • Low economic/ employment growth
    • Rising tax burden
reasons for poor household savings19
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
what to do about household savings
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
reasons for poor corporate savings
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?
what to do about corporate savings
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
saving investment and growth in south africa

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
sa and the rest of the world

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
sa and the rest of the world cont

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.)
are we facing a crisis
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?
how have we responded
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?
government investment

% 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
importance of partnership
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
importance of partnership35
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
major challenges
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
premise for government policy
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
implications of poor domestic savings
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
is it government s responsibility
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
role of government in summary
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)‏
slide42

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