Unique solutions needed for SA's savings hole

South Africans are favouring investments into residential property and other non-traditional financial assets over traditional savings products, according to the latest research by Old Mutual into the country's savings levels.

The growth in flows into residential property and other non-traditional financial assets have exceeded those in the traditional savings industry with the result that 'non-traditional' savings increased from 13% to 18% of total adjusted savings between 1996 and 2006.

Grey money accounts for a substantial portion of non-traditional savings in the country. This is the money that is mostly held in poor black communities and is kept at home or by small savings clubs and circulates outside of the formal financial system. In 2006, grey money holdings escalated to R33 bn from R11 bn in 1996.

Grey money is not a phenomenon unique to South Africa. It is evident in the United States, and it is where it is regarded by large financial players as a business growth opportunity.

Presenting the findings of this study in Johannesburg today, Derrick Msibi, the executive director at Old Mutual Investment Group South Africa (OMIGSA), says that South Africa's households have enjoyed accelerating real income growth in the past decade, but spending has risen even faster and as a result, the net personal savings ratio in the country has fallen to less than zero.

Msibi says that household expenditure has increased dramatically since 1996, but an increasing proportion is being spent on transport, housing, health and education. "Expenditure has also been diverted to cell phones, gaming and the lottery, leading to increased revenues in these sectors. The performance of the investment markets over the last decade has dramatically improved the net wealth of our households."

Another key finding of the study is that South Africa has a "savings hole" owing to the country's unique demography.

Paul Hanratty, the managing director of Old Mutual (SA), says that although black households have greater incomes than in the past, these households are playing catch up and are spending their incomes on homes, cars and white goods. In contrast, there is further decumulation of wealth in white households than has been the case historically.

This "savings hole" - due to our unique demography - is the real challenge in South Africa because there is no similar structural challenge anywhere else in the world.

"From a social and savings point of view, a unique solutions set is required to encourage the black diamonds to save," Hanratty says. "The government alone can't do it and the private sector cannot do it alone. Business and government will have to build partnerships to tackle this problem."

The impact of the "savings hole" is that it creates a challenge to GDP growth. Economic growth will have to be financed though foreign investment flows, and largely through foreign direct investment (FDI) as opposed to portfolio flows, if we want to turbo boost growth and alleviate poverty in South Africa.

Hanratty points out that South African consumers are not necessarily profligate as most credit extension is on residential property (housing). This is evident from the fact that an increasing proportion of after-tax income is now servicing mortgage debt. Residential property has been a good investment and savings vehicle over the last decade due to falling interest rates and remains one of the foundations for wealth creation around the world today.