South Africa’s savings rate lags behind other emerging markets

Compared to other emerging economies, South Africa scores very low on domestic savings levels when put side by side with countries such China and Malaysia.

Kieran Godden, Divisional Director: Liberty Corporate Consultants and Actuaries, says “Increased savings levels are essential to advancing a country’s economic aspirations. For example, saving via the government’s national retail bonds means the state will be able to borrow cheaper for spending on infrastructure development; this in turn creates employment opportunities. Therefore, higher household savings levels have a domino effect on the economy because it allows governments and companies to access capital for reinvestment. At 52% of the national GDP, China’s domestic savings rate is among the highest in emerging markets, South Africa savings only constitutes 20% of GDP. It’s important to note that there is a strong correlation between a nation’s savings record and it’s capability to attract investment.”

“While government needs to be at forefront of instilling a savings culture among the populace, the financial services industry also has a big role to play, especially from an educational point of view.”

South Africa has a well developed financial services industry which offers a variety of products that can be used for saving purposes. Godden points out retirement products as viable savings tools, because they are long-term and also secure one’s financial future. Money placed in a retirement annuity, for example, is invested into different asset classes such as equities or unit trusts, which gives the investor favourable returns over time. Employee benefit products can also be used as a source of cash by both the state and other institutions, money sitting in retirement products can be rechanneled into government or corporate bonds.

There are two types of saving, compulsory saving which would include products such as life insurance policy or pension fund, and discretionary savings such as a bank account or private share portfolios. According to Godden, both methods are important but it all depends on an individual’s needs.

“Saving via banks is also advisable as their products are easily accessible, money saved through banking institutions does not sit idle; banks make use of the capital in one form or another. A life insurance policy can also act as a savings tool, in the event that the policy is cashed by the beneficiary the money can be reinvested in other products as means of creating further wealth.” says Godden

From a macro-economic point of view, South Africa has an opportunity to create a policy framework that can l encourage savings and thereby drive economic growth and stability. Historically, the income tax environment in South Africa did not offer any incentive to low income earners; the proposed tax amends are likely to yield some recourse to those in the lower income brackets and encourage saving.

High income earners are also overburdened with hefty income tax levels, and this leaves very little in their purse for saving. Government needs to create a tax environment that encourages this group to save instead of spending the little they are left with.

“Through the establishment of the umbrella fund products, Liberty Corporate has been able to attract both low and high income earners into its pool of retirement products. South Africa’s emerging middle class has had very little impact in changing the country savings profile, increased savings from this group can result in an improvement in the country’s domestic savings rate.” says Godden