10/06/08 Savings: A macroeconomic perspective Presented to the SASI Roundtable by Elias Masilela, National Treasury 26 May, 2005

Determinants of savings 10/06/08 Determinants of savings Income MPS rises with rising income Social attitudes (thrift)‏ Financial institutions for safe deposit keeping Banks Insurance and pension funds Building societies Other institutions Rate of return versus costs Inflation Large consumption and investment expenditure needs

SA’s experience Rising marginal tax rates 10/06/08 SA’s experience Rising marginal tax rates High rates of inflation over a long time Government dissavings High recurrent expenditures Low external savings – sanctions Periods of negative interest rates Low economic growth rates Skewed income distributions High dependency ratios Rising marginal propensities to consume Greater social transfers Financial liberalisation Credit-financed consumer spending Low income levels / unemployment Culture – community ties as substitute for formal saving

Why savings are important 10/06/08 Why savings are important

Saving, Investment and Growth in SA 10/06/08 Saving, Investment and Growth in SA

SA and the rest of the world 10/06/08 SA and the rest of the world

SA and the rest of the world cont. 10/06/08 SA and the rest of the world cont.

10/06/08 Who saves?

Contributions to domestic savings 10/06/08

10/06/08 Households

Are we facing a crisis? Do savings alone drive growth? 10/06/08 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 acc deficit? But We want higher investment. What are the funding options?

10/06/08 Growth Update

How have we responded? Reduced government dissaving 10/06/08 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?

10/06/08 Government finances

Graph on government balances 10/06/08 Graph on government balances

Graph on government balances 10/06/08

Government investment 10/06/08

Impact on the consumer and investor 10/06/08 Update

10/06/08 Inflation

Importance of partnership (1)‏ 10/06/08 Financial Sector Summit Response to rally call of SACP/COSATU Red October campaigns Shift focus away from access to credit towards broader financial services, particularly savings Noted high costs of services = poor access Increase efficiency in delivery of services 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 partnership (2)‏ 10/06/08 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 Dichotomous nature of financial sector 10/06/08 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 10/06/08 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 10/06/08 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? 10/06/08 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 10/06/08 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)‏

THANK YOU RE A LEBOHA SIYABONGA DANKIE 10/06/08 THANK YOU RE A LEBOHA SIYABONGA DANKIE ___________________________________ Contacts: Elias.masilela@treasury.gov.za Jonathan.dixon@treasury.gov.za