SA increases reliance on foreign funding

SA depends more heavily on foreign capital to finance new fixed investment projects as the local savings rate falls, latest Reserve Bank figures show.

Foreign capital financed 15.5% of gross capital formation in 2023’s fourth quarter, up from 3.3% in the third quarter, according to the Reserve Bank’s latest quarterly bulletin, which shows SA’s national savings rate fell to 14% in 2023 from 14.9% in 2022. For the fourth quarter, national savings were down to only 12.7%. SA’s savings rate is historically poor, with government generally dissaving, households saving little and the only meaningful saving by companies with cash on their balance sheets partly because they can’t find projects yielding a high enough return to offset the risk.

Stanlib economist Kevin Lings said last year that SA’s savings rate was well below the 34% average for emerging markets, many of which have much higher rates of investment in the real economy. The quarterly bulletin said household savings fell to 1.7% in 2023, from 2% in 2022 and the corporate savings rate rose to 15.9%, from 14.1%. With government spending significantly more than its revenue its dissavings rate rose to 3.6% for 2023 from 2022’s 1.3%.

Lack of household savings reflects pressure on consumers with low growth and high inflation. Households’ debt rose faster than their disposable income last year, the bulletin reports, as did debt-servicing costs as the cumulative 125 basis point in rate hikes took a toll.

Debt service costs rose to nearly 9% of households’ disposable income in 2023, from 7.3% in 2022. SA’s dependence on foreign capital became more of a vulnerability in the past couple of years as the current (trade) account of the balance of payments went into deficit with foreign capital inflows slowing or turning into outflows.

The bulletin shows a fourthquarter switch to outflows on the financial account of the balance of payments, on sharply negative portfolio flows. The financial account, measuring portfolio flows in and out of bonds and equities as well as foreign direct investment in or out of SA, recorded inflows of 1.3% of GDP for 2023 as a whole, up from 1% in 2022.

That would not have sufficed to finance the deficit on the current account of the balance of payments, rising to 1.6% for 2023, from 2022’s 0.5%.

A widening current account deficit and muted capital inflows would have been one factor weighing on the rand exchange rate last year.