Presentation on theme: "SAVINGS: A MACRO PERSPECTIVE. 2 Determinants of savings Income Social Attitudes Financial Institutions for safe deposit keeping Banks Insurance."— Presentation transcript:
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
Long Term Trends Declining 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?
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 Saving,Investment and Growth in South Africa
28 SA and the rest of the world
29 SA and the rest of the world (cont.) Gross national savings, in percent of GDP Percentage South AfricaEuro regionAsian NICs Developing AsiaAfrica
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 Government Investment General government investment % of GDP
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 DETAILS Mr. Ahmed Jooma Chief Director: Financial Services National Treasury of South Africa (L) (M)