1. 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

4. Long Term Trends
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?

25. Corporate tax (% of GDP) 20051
Estonia
1,4 2
Germany
1,8 11
Brazil
2,3 22
China
2,9 25
India
3,2 28
Ireland
3,4 37
South Korea
4,1 43
Australia
5,3 44
Malaysia 50
South Africa
6,4

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
Selected South African ratios 10 15 20 25 30 35 40
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
Percentage -3 -2 -1 1 2 3 4 5 6 7 8
GFCF to GDP
Gross saving to GDP
GDP growth

28. SA and the rest of the world
Gross national savings, in percent of GDP 10 15 20 25 30 35 40
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
Percentage
South Africa
World
Advanced economies
Other emerging market and developing countries

29. SA and the rest of the world (cont.)
Gross national savings, in percent of GDP 10 15 20 25 30 35 40 45
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
Percentage
South Africa
Euro region
Asian NICs
Developing Asia
Africa

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 1 2 3 4 5 6 7 8
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
% 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)