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The cultural divide of savings and investment in a dual economy

11 July 2013 Berniece Hieckmann, Metropolitan
Berniece Hieckmann, Marketing and Business Development Executive at Metropolitan.

Berniece Hieckmann, Marketing and Business Development Executive at Metropolitan.

To encourage South Africans to save, Government has declared July “National Savings Month”. But, what does saving actually mean for South Africans caught in a dual economy?

Berniece Hieckmann, Marketing and Business Development Executive at Metropolitan, with a special interest in the entry-level market, believes that post-apartheid expectations were for less poverty and for people to advance economically to swell the ranks of the middle class, which is transformation from the bottom-up. Yet, one of the most marked changes has actually been the change in the demographic of the wealthy. The rate of improvement of the financial circumstances of entry-level market citizens has been disappointing and this has also led to a slower rate of growth of the middle class. The transformation has thus been more top-down than bottom-up.

The net effect is that the inequality gap remains vast and seemingly impossible to span, creating a dual economy where Westernised and traditional African influences have both left their mark. This diverse interplay sees South African culture adapting and evolving as both socialist and capitalist mindsets meet.

One often hears about South Africa’s low savings rate and lack of savings culture. Treasury has identified it as “a policy concern”, stating that increased savings is an important part of Government’s economic policy agenda. Whether one talks about individual household savings or the overall national savings rate, the rationale for increasing savings is sound. Higher levels of personal savings reduce financial vulnerability and debt dependency. An increase in the national savings rate will reduce reliance on foreign capital and help fund higher rates of investment. This leads to economic growth and job creation.

“These sentiments sound so reasonable when applied to the upper and middle markets. However, the presumption is that in the entry-level market, where many households survive on the breadline, savings just cannot and do not exist,” Hieckmann adds.

However, research undertaken by financial service provider Metropolitan, shows that the entry-level market has an entrenched culture of saving. It is the methods of saving that are not fully understood, as these predominantly focus on tight budgets and pooling money. It is not a traditional Eurocentric view of saving, but more of a survivalist mechanism.

Hieckmann says: “Providers of products to the entry-level market should make a concerted effort to understand their needs from their perspective. We often make presumptions based on our own experiences.”

Hieckmann has noticed that lending and savings appear to blend in this market. Savings are viewed as either in arrears –traditional goal-based savings where money is put away until the outcome is achieved, or in advance – a loan or credit is taken to achieve the goal, and then budgets are tightened to pay it back.

Metropolitan’s research shows how inflation modelling has a very different effect on each market segment. When one looks at how CPI(X) is measured, it is an index of averages across all market segments. However, if one measures current CPI(X) per market segment it is clear that the upper and middle classes experience moderate CPI(X) while the entry-level market is often far more highly impacted. The knock-on effect of every increase (be it fuel, water, electricity, etc.) multiplies in this market, where there is little linked interest rate exposure as a buffer.

Hieckmann points out that recent strikes demanding salary increases above average CPI(X) are not so incongruous given the effective CPI(X) of the entry-level market. This inflation factor threatens to exacerbate the inequality gap and entrench the dual economy. It leaves small, irregular or inconsistent amounts available for savings, which do not suit conventional savings mechanisms.

”No wonder this market created its own investment products like stokvels and burial societies to meet their investment needs. Nevertheless, every South African, wherever they fall on the spectrum of our dual economy, should have access to value driven and affordable financial services.”

“We welcome Government’s proposed retirement reforms, which include easier access to tax-exempt discretionary savings vehicles. Ultimately, Government needs to ensure a savings-friendly environment from a tax and regulation perspective, leaving companies to attract clients, create the right products and compete with each other to give clients the best deal,” says Hieckmann.

The entry-level market needs uncomplicated, cost-effective products that preserve capital, consider longevity risk, have low penalties and tax rates and allow flexibility to review terms. Bank accounts for savings purposes are not popular, as the money is too accessible. Hieckmann points out that this market wants the dichotomy of having money locked out of reach but also available to fund emergencies. Intermediation remains vital and insurers will have to invest in the financial empowerment of this segment.

The current stagflationary economic environment, characterised by slow growth and high inflation, has exposed South Africans’ vulnerabilities in terms of their income, expenditure, savings and debt. Many households battle to manage their finances and debt servicing remains perilously high across the economic divide.

“South Africans need to take charge of their lives, and indirectly the economy, by saving. We look forward to innovations that will appeal to each economic segment across our complex dual economy to encourage a strong savings culture,” concludes Hieckmann.

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