Plugging South Africa's savings gap
The shifting age demography in South Africa is contributing to a savings 'black hole'. And while the total stock of savings in the country has grown significantly over the last decade, this growth is almost entirely due to spectacular market returns rather than new capital inflows. These were some of the key findings revealed at an Old Mutual Media Conference on South African Savings Levels, held in Johannesburg on 28 August 2007.
Statistic show disappointing net cash inflows to every segment of the local savings landscape. The extent of this problem is highlighted when comparing South Africa's new net client cash flows to those recorded in other countries around the world. The international norm is to attract as much as 5% of total assets per annum in new money. South Africa manages a paltry 1% per annum.
Income has been rising steadily in recent years. The question is why more of this additional cash is not flowing into the savings industry.
Dramatic increases in household expenditure
The truth is that every rise in income is met by an equal rise in expenditure. "While people have been earning more over the last ten years, they have also been spending more," said Derrick Msibi, executive director of Old Mutual Investment Group South Africa. National consumption expenditure across South African households reached R1.08 billion in 2006. The major portion of this expenditure is split across basic necessities like food, clothing, transport, housing, healthcare and education. These costs continue to rise, often at rates well in excess of official inflation.
Unfortunately South Africa struggles with "a very strong culture of consumption" which results in spending patterns adjusting upward with income. Msibi points out that "expenditure has also been diverted to cell phones, gaming and the lottery, leading to increased revenues in these sectors." Latest estimates suggest that expenditure on these items will top R100 billion in 2007.
The end result is a negative net savings ratio. Put simply, South Africa has entered a period where net expenditure exceeds net income. This does not paint a rosy picture for savings in coming years.
Ageing population shrinks the savings pool
Old Mutual divides the local saving environment into three age categories. The younger generation aged 20 to 24 are categorised as 'Dissavers'. Those aged 25 to 54 are termed 'Savers' and those 55 and above are referred to as 'Decumulators'. A number of factors have contributed to an unnatural age demography curve in South Africa.
The result is an excessive number of people in the 'Dissavers' category and a shortage of contributors in the 'Savings' category. The situation is further exacerbated by a significant increase in 'Decumulators', in part due to more early retirements as South Africa's employment equity drive gains momentum.
Paul Hanratty, managing director of Old Mutual South Africa believes the age demography curve will normalise in the future and South Africa will experience a natural structural rise in savings.
Equities propagate the net wealth effect
South African savers owe a debt of gratitude to the strong performance from equities and property over the last three to five years. "Over the last three years the acceleration in savings stock has been 17% per annum," said Msibi. This figure starkly contrasts with the 10-year average of around 4% per annum compound growth.
To appreciate the significance of the recent equity market bull run on the national savings stock, consider that the R1.9 trillion in traditional market savings makes up close to half of the total R4 trillion invested in both traditional and non-traditional savings.
A big challenge facing South Africa is to convince the emerging middle class to save. Although black people now enjoy a larger share of total income than ever before, estimates are that as much as 92% of the R180 billion of personal disposable income in this market segment is lost to consumption spending. The balance is going to non-traditional savings such as housing and stokvels.
South Africa's savings stocks will come under tremendous pressure should equity markets reverse. The current 'wealth effect' created by rising equity and house prices could just as easily turn negative and South Africans need to save more to avert this potential threat.
Editor's thoughts:
We have spoken before about South Africa's negative net savings rate. We have also mentioned the impact of rising property and stock market prices on the average citizen. If new savings remain at current low levels, a market downturn could result in the total savings stock in South Africa diminishing. What incentives could be introduced to encourage South Africans to save? Send your comments to [email protected]
