Absa economist advises South Africans to save

The declining rate of saving within the domestic economy poses serious challenges for the domestic economy's ability to finance the pressing needs of investing in plant and equipment, productivity growth, real income, and the ability of the South African economy to continue relying on foreign capital inflows to finance domestic investment needs, says Ridle Markus, Absa senior economist.

He adds that the persistent current account deficit increases the need to borrow capital abroad to finance domestic capital formation.

Markus says it appears that initiatives to promote national saving are not being prioritised.

"With issues such as rising household debt, the current account deficit, the inflation rate, rising employment levels and the movements of the domestic currency making headlines all the time, very little has been said about the insufficient levels of domestic saving which in some way, are shaping these variables."

"The near-term prospects for national savings appear somewhat bleak with household saving ratio to personal disposable income expected to remain negative, hovering around -0,2% to -0,3% levels over the next year."

According to Markus the ratio of gross national saving to Gross Domestic Product (GDP) will deteriorate further and average an estimated 13% in 2007, compared with the expected average of 13,5% in 2006.

However, he does not anticipate the low saving level to adversely affect economic growth.

"Despite this bearish saving outlook, the low national saving rate is not expected to be a significant drag on GDP growth and should rather encourage the more efficient use of the countrys resources. The average real GDP growth of around 4,2% and 4,3% year-on-year in 2006 and 2007 respectively can still be expected and is likely to pick up to 4,8% in 2008."

Markus points out that the low rate of savings in SA is caused by factors including:

* Low nominal interest rates that are making saving in traditional saving products relatively unattractive.

* Capital gains in housing and equities which have raised households' abilities to spend without having to save.

* The rise of the black middle class, a development which has contributed to overall increase in household spending and increased demand for credit and this leaves little room for additional saving.

* Financial innovation and the development of financial markets, which has reduced the need to save, especially for transaction purposes.