"Every ‘rich’ nation was ‘poor’ at some stage," explains Dr Adrian Saville, professor in Economics at the Gordon Institute of Business Science, who compiles the Investec GIBS Savings Index for South Africa.
"Likewise, none of the ‘economic miracles’ also known as ‘saving stars’ such as South Korea, Chile and Singapore were born with saving spoons in their mouths.”
Their household savings rates are above 15 to 20 percent even in the face of low-income rates. “How did they achieve elevated rates of saving and investment off low-income levels? What would do the trick for South Africa to transform from bad spenders to effective savers and wise investors?"
Renè Grobler, head of Investec Cash Investments, discusses these questions with Saville during July, South Africa's National Savings Month.
Grobler states: "We launched the Investec GIBS Savings Index to highlight the real facts about saving and encourage an ongoing conversation around the importance of saving for South Africa. The Index measures the savings levels and the critical factors influencing savings in the country. By the fourth quarter of 2018, the Index reached its lowest level of 60 points, while a score of 100 would be regarded as a 'pass mark' for the country. This is a far cry from miracle status."
“A country needs to save its way to prosperity”
Saving for South Africa – part one
The only way that you can get into a habit is to start that habit. It may require some self-discipline, but once the habit is established you are a saver.
Learning from the “miracle” economies
The research from the Savings Index identifies the structural ingredients that build country prosperity. These ingredients are common across the countries that are identified as “economic miracles” such as Chile, Costa Rica, Estonia, Poland, Taiwan and South Korea.
Combined, these ingredients produce vast gains in per capita incomes, productivity, industrial complexity and sustained improvements in developmental indicators, such as life expectancy, education levels, social mobility and inequality.
The six ingredients include:
- A high rate of savings
- Access to improving healthcare
- Access to improving education
- A favourable demographic structure
- A stable policy environment with effective institutions, and
- Economic openness
These six ingredients are needed to promote sustained, inclusive and elevated growth and development and their absence provides the basis for understanding why, and how, a country is caught in a low-growth trap.
Of the six ingredients, the most powerful explanatory factor across countries and through time is the first mentioned – the savings-investment rate.
Saville adds: “Based on this research, the first step in understanding and explaining a country’s economic performance and progress starts with an assessment of the investment rate which in turn is generally explained by the level of savings available to fund investment.”
SA economy treading water
“For South Africa to achieve an annual 5.4 percent economic growth rate which is what the National Development Plan has as the official policy position, we need a savings and investment rate of about 30 percent. Instead, South Africa’s savings and investment rate sits at roughly half that, at 15 or 16 percent,” says Saville.
He says what we have been seeing the past four or five years was just a tiny percentage growth and was only replacing existing capital, instead of growing capital.
All sectors pulling together
Saville adds that of the three other sources of savings - the corporate sector (companies) governments and households – the corporate sector has been the biggest contributor to net savings in South Africa.
As a developmental state, the government is running a budget deficit currently which means the government is dis-saving as it spends on necessary infrastructure developments.
“That really leaves only one place South Africa can go to, to fix this savings problem or to fill the savings and investment gap - the household sector.”
However, to achieve this, households require stronger backing from the government and corporate sectors. It goes without saying that in order to begin saving, individuals require a source of income as a launchpad.
In order to make savings a habit, one needs the ability to do this (source of income), aligned with a willingness to delay gratification for a future goal.
"There is a strong link between these sectors - stimulating the economy by supporting small and large business growth in turn supports the individual household by creating more jobs and thereby generating household income. The relationship between government, the corporate sector and households needs to be a symbiotic one to stimulate savings, investments and growth.”
Saville says on a national level it is also a combination of collaboration, cooperation and coordination between regulators, governments, policymakers and the private sector that could lead to higher savings rates.
“For example, Chile made saving for retirement compulsory in the 1980s. One didn’t have an option and you had to contribute to a national pension fund. When you resigned from a job, your pension fund contributions stayed in the fund until your retirement. It is the opposite in South Africa where you are allowed to take some or all of your retirement savings out when changing jobs, before retirement.”
SA household savings rate at zero
“The shocking truth is that South Africa’s household savings rate is zero. There certainly are households who save through contributions to pension funds, retirement annuities, unit trusts and investments in their homes and properties. However, it turns out that for every rand one household saves, another one is ‘dis-saving’ by buying a car on credit, or spending on a credit card," Saville says.
A learnt behaviour
Grobler points out that from research done for the Index, saving is a learnt behaviour. “Assuming a basic level of income, saving could be one of the most beneficial habits you adopt for your future wellbeing, and one your future self will definitely thank you for.
"The only way that you can get into a habit is to start that habit. So, if you are not in the habit of saving, the month of July is a chance to start by paying yourself first. It may require some self-discipline, but once the habit is established you are a saver.”
She proposes three key tips to achieve this:
Understanding that savings is a learnt behaviour means it requires disciplined execution; technology can be a useful tool to achieve a level of automatic saving.
A good example is setting up scheduled payments from your primary bank account to a savings account monthly - the day you receive your salary or primary income.
This is one of the easiest ways to ‘save automatically’ and ensures that you prioritise saving before spending on luxury items.
Secondly, schedule a call with your financial adviser at least annually to check in on your savings levels; review your financial circumstances, risk appetite and investment options to ensure you are achieving the best possible returns on your hard-earned money.
Thirdly, maximise your tax breaks, such as Tax-Free Savings. The added incentive of less tax is a win that drives many people to save.
It turns out that for every rand that one household saves, another one is ‘dis-saving’ by buying on credit.
A reservoir of investments required
Grobler says it is true that we are a consumer-based society that to an extent drives the economy. But you cannot consume your way to prosperity: the opposite is true – a country needs to save its way to prosperity. Savings becomes the reservoir of investment.
Saville adds that an individual, whether a person or a business who is saving, becomes the reservoir of investments which in turn becomes an economic engine for new factories, homes, highways, harbours and jobs. “One gets on to a fly-wheel that is self-fuelling and self-feeding,” he says.
Grobler adds: “There’s a real opportunity for South Africa to become the next economic miracle on the African continent. It starts with each individual household and person in that household – taking the first step by saving a little bit every month and turning it into a habit.”
Saving for South Africa
The Savings Index is devoted to stories of transformation and change, stories of countries, communities and families that make the journey from "poor" to "prosperous".
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