More critical for South Africans to save

Moody’s recently affirmed South Africa’s investment grade rating. However, the rating came with a negative outlook, and one of the challenges cited was the low national savings.

The latest results from the Investec GIBS (Gordon Institute of Business Science) Savings Index confirms that South Africa’s national savings is at a low point, with a score of 63 in the last quarter of 2015 – with 100 representing a “savings pass mark” – the lowest score in more than 20 years of the calculation of the index.

The recent low scores, and even more significantly the sustained deteriorating trend, points to the fact that we are less than two-thirds of the way towards a savings and investment environment that will support SA’s ambition of greater than 5% GDP growth.

Getting to the root of the problem

The insights of most interest to financial advisers pertain to the reasons behind the deterioration of the environmental pillar.

Let’s start with the positive influence on the savings environment – rising interest rates. The benefit here is twofold.

Individuals with disposable income or savings will now have access to a higher risk free rate on their cash savings. In times of uncertainty and market volatility, history shows that many are attracted by the safe haven offered by cash. However, in the last few years cash has not been attractive with interest rates below inflation not providing a real return on these funds. This has not been the case of late with positive real returns from cash in a rising interest rate environment. South Africa’s interest rate is further predicted to increase to potentially 8% this year, depending largely on inflationary factors.

Secondly, South Africa’s relatively high real interest rate could be a contributing factor to incentivising capital inflows and investment from foreigners, which in turn would stimulate the economy. But although the higher interest rate might sound like a positive for the country, we cannot ignore the relatively high level of indebtedness of South African households. Higher interest rates in this instance translate into higher debt servicing costs and in turn lower disposable income available for saving.

Drop in per capita income

That brings us to the biggest negative influence on the latest score of the index; the drop in per capita income versus the benchmark of the savings star countries in 2015, termed as such due to their sustained average economic growth rate of 7% per year for 25 uninterrupted years or more.

Botswana, Brazil, China, Hong Kong, Indonesia, Japan, Malaysia, Malta, Oman, Singapore, South Korea, Taiwan and Thailand have earned saving star status. But for South Africans, disposable income will be under continued pressure this year as consumers feel the pinch of inflation, higher debt servicing costs and an increasing epidemic of unemployment.

The actions of the wise

The wise will start tightening expense budgets, but for many living on the bread line, saving at this point could seem like a luxury and not a necessity.

With this backdrop it will be only the very disciplined who will manage to stay on track with their savings plans and it will be incumbent upon the financial adviser community to help savers stay the course despite the challenging conditions.