Saving is a learnt behavior
While South Africa’s economy, according to the Investec GIBS Savings Index, finds itself in a deep slump there are some encouraging signs of an improvement in overall savings.
The most recent Investec Gibs Savings Index data shows South Africa has improved markedly on all three factors – the stock (pool), the flow, and the environmental factors impacting savings – with a score of 63.7, higher than the final print number of 59.7 in 2018.
The state of the economy
The index shows unemployment figures are stuck, having averaged more than 25% over the past ten years, having been reported at 27.1% at the start of 2019. If we use the broader, and arguably more honest, ‘expanded’ measure of unemployment, South Africa’s unemployment figure stood at about 37% at the start of 2019. The youth unemployment figure is even more alarming, standing at 54.7% at the start of 2019.
Economic growth, according to the Index, measured by growth in gross domestic product (GDP), has found a ‘new normal’, hovering in the shallows above 0% but below 2% per year since 2013, and averaging just 1.0% per year since 2009 a far cry from the hoped for 5% growth. Perhaps even more sobering is that sluggish growth alongside a population growth rate of 1.6% a year means that, measured in constant rand terms, South Africa’s per capita income at the start of 2019 was the same level as 2008 – effectively a ‘lost decade’. Moreover, this result is against the backdrop of South Africa having permanent residence on the wrong side of the Gini coefficient, where we take up our place as one of the most unequal societies in the world.
Plotting the index alongside GDP growth for the 28 years since formation offers a neat visual summary and reinforces the point that South Africa does not have the necessary saving rate, structure or patterns to support fast growth. The closest the country came to this was in the middle part of the noughties decades. The economy simply does not have the necessary ingredient, savings, to fund the investment needed to feed rapid growth.
The savings bottleneck
According to the index, the South African economy is savings starved, which chokes investment, so where does the savings bottleneck reside?
Three entities can save: households, firms and government. On this score, the evidence is unambiguous: firms in South Africa already save a substantial amount relative to global peers. Conversely, developmental demands and social welfare needs mean that, by its nature, the public sector is a dis-saver.
Further, the data makes it clear that not only is the household savings rate in South Africa low, but it steadily declined over the last 20 years, stabilising in the shallows just above zero. For all intents and purposes, the household sector in South Africa flirts with life as a ‘deficit spender and dis-saver’.
As an aside, proposals to lift the South African household saving rate are frequently met with protests that income levels in the country make this an impossible mission.
According to the index, it is likely to be in the household sector that efforts have the most upside in terms of boosting saving behavior and lifting the country’s saving rate as a basis for driving investment and fueling sustained and elevated growth.
However, the index states, this path to prosperity is not just a function of how much a country saves, it is also a function of the manner and effectiveness with which saving is channeled into investment. If households shift spending patterns from funding consumption that feeds instant gratification to instead the financing of productive investments, there is a powerful set of spillover, multiplier and linkage effects that offer the prospect to build smaller businesses, promote employment intensity and unwind industrial concentration. Changing household saving behaviour offers the prospect for elevated growth that is inclusive and transforming.
Behavioural economists speak of nudges
“Governments and financial institutions often provide incentives to save, such as attractive interest rates or incentives such as tax breaks. However, academic research in recent years has shown that humans frequently fail to respond positively to these incentives, even when it is in their economic interest to do so,” said Dr Adrian Saville, Professor of Economics at the Gordon Institute of Business Science (GIBS).
“Behavioural economists now speak of “nudges”, or changes to the economic decision-making architecture, which channel human behaviour in ways that are economically beneficial to the individual. We are all familiar with nudges that encourage poor savings behaviour of course, such as sweets or cool drinks on offer at the checkout queue in a supermarket, but the idea here is to use the same behavioural processes to encourage better long term economic decisions,” said René Grobler, Head of Investec Cash Investments.
“Banks or insurers, for example, can configure their offering in such a way that scheduled payments into a savings product are either the default option, or where it is easy to do so, or where there is some immediate reward for to doing so, such as entry into a competition. These nudges work on human tendencies towards either inertia or instant gratification, but with a more rational outcome at the end of it,” added Grobler.
“Advances in technology, such as in the configuration of online applications, provide a myriad of opportunities for financial services providers to help individuals in all walks of life with the right nudges towards better saving,” said Grobler.
A learnt behavior
“Research conducted in compiling the index shows that saving is a learnt behavior. Assuming a basic level of income, saving could be one of the most beneficial habits your client can adopt for his or her future wellbeing. The only way that a person can get into a habit is to start that habit. It may require some self-discipline, but once the habit is established your client will be a saver,” said Saville.
“Understanding that savings is a learnt behaviour means it requires disciplined execution. A good example is setting up scheduled payments from a primary bank account to a savings account monthly – on the day a person receives his or her salary or primary income. This is one of the easiest ways to ‘save automatically’ and ensures saving is prioritized before spending on luxury items. Secondly, the client can review his or her financial circumstances, risk appetite and investment options annually, to ensure he or she is achieving the best possible returns on his or her hard-earned money. Thirdly, a client can maximize his or her tax breaks, such as tax-free savings. The added incentive of less tax is a win that drives many people to save,” concluded Saville.
Writer’s Thoughts
It is reassuring that we can take small steps in the right direction when it comes to savings. And as mentioned above, however, it may require some self-discipline, but once the habit is established your client will be a saver. Do you believe a disciplined approach will boost saving behavior and lift the country’s saving rate? Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts [email protected]
