No sav­ing grace

Gov­ern­ment must pro­vide mean­ing­ful in­cen­tives to com­pa­nies and in­di­vid­u­als

Finweek English Edition - - Economic trends & analysis - BY HOWARD PREECE howardp@fin­week.co.za

SOUTH AFRICA VI­TALLY NEEDS a huge and sus­tained in­crease in the level of gross do­mes­tic sav­ings (GDS). Un­less that hap­pens there will be no chance – ex­cept by tak­ing mas­sive risks with the en­tire econ­omy – of achiev­ing one of Gov­ern­ment’s key pol­icy aims. That ob­jec­tive is to steadily push the ra­tio of fixed in­vest­ment to gross do­mes­tic prod­uct back to the 25%+ rate that pre­vailed in the Sev­en­ties.

It’s a chronic fail­ing of the much-touted Ac­cel­er­ated and Shared Growth Ini­tia­tive (As­gisa) that it barely even ac­knowl­edges the se­vere and steadily ris­ing prob­lems that SA faces from its dis­mal sav­ings per­for­mance.

Just how mis­er­able that per­for­mance has been is shown in the graph. It in­di­cates that SA has one of the world’s worst sav­ings records. The March 2007 Quar­terly Bul­letin from the SA Re­serve Bank also re­flects the grim fact that the po­si­tion has de­te­ri­o­rated even fur­ther. The ra­tio of net sav­ings to dis­pos­able house­hold in­comes was neg­a­tive (-0,5%) in 2006. That’s the first time in 60 years that fig­ure has been in the red.

The Bul­letin also notes: “The ra­tio of gross sav­ings to GDP de­clined abruptly from 14,25% in the third quar­ter of last year to 13,75% in Oc­to­ber-De­cem­ber.” It added: “This de­te­ri­o­ra­tion of the na­tional sav­ings ra­tio brought the an­nual sav­ings ra­tio down to a his­tor­i­cal low of 14% of GDP.”

We must now con­sider, against that back­ground, the arith­metic re­la­tion­ship be­tween sav­ings, fixed in­vest­ment (or gross cap­i­tal for­ma­tion: GCF, as it’s now for­mally called) and the cur­rent ac­count of the bal­ance of pay­ments.

In cal­en­dar 2006, SA ran one of the high­est pro­por­tion­ate cur­rent deficits (-6,4%) – that is, as a per­cent­age of GDP – in the global econ­omy. That was ex­ceeded only by Spain (-8,5% at the latest count) and was higher than the United States (-5,9%) and Aus­tralia (-5,1%). More, the SA fig­ure for the Oc­to­berDe­cem­ber pe­riod last year was an even more whack­ing -7,8% an­nu­alised.

But is the SA sit­u­a­tion re­ally that se­ri­ous? Com­men­ta­tors have rea­son­ably drawn at­ten­tion to sev­eral seem­ingly com­fort fac­tors: • SA con­tin­ues to en­joy an es­pe­cially good fi­nan­cial stand­ing in­ter­na­tion­ally. The suc­cesses of Fi­nance Min­is­ter Trevor Manuel and SA Re­serve Bank Gov­er­nor Tito Mboweni (with credit to Pres­i­dent Thabo Mbeki, who has ul­ti­mate charge) are glob­ally ap­plauded. That means SA is cur­rently lit­er­ally well re­warded – with enor­mous net cap­i­tal in­flows that more than fi­nance the cur­rent ac­count deficits. • The cur­rent ac­count short­fall is partly ex­plained by hefty im­ports of plant and equip­ment, which were the nec­es­sary ac­com­pa­ni­ment of the hand­some 12,8% real in­crease in fixed in­vest­ment last year. In­ci­den­tally, that rise sent the GCF/GDP ra­tio up to 18,6% – a big rise over the 15% level to which it had fallen in 2002 and ap­par­ently bring­ing the 25% tar­get by 2014 within fea­si­ble reach. The fourth quar­ter deficit in 2006 was sig­nif­i­cantly boosted by ex­traor­di­nar­ily high pur­chases of oil. Ex­clude them and the fig­ure would have been close to “only” 5,5%. So it’s un­der­stand­able that SA is gen­er­ally so laid back about its huge cur­rent deficit. Crit­i­cally, the rel­a­tive calm of the rand ex­change rate in re­cent weeks ap­pears to jus­tify that.

Still, I’d still ur­gently ad­vise SA to take note of what Larry Sum­mers, for­mer chief econ­o­mist at the World Bank and for­mer US Trea­sury Sec­re­tary in the Clin­ton Ad­min­is­tra­tion told The Econ­o­mist at the end of 1996 – just be­fore the “Asian con­ta­gion” cri­sis. Sum­mers urged emerg­ing mar­ket na­tions in

“Close at­ten­tion should

be paid to any cur­rent ac­count deficit in ex­cess of

5% of GDP.”

par­tic­u­lar that “close at­ten­tion should be paid to any cur­rent ac­count deficit in ex­cess of 5% of GDP, par­tic­u­larly if it’s fi­nanced in a way that could lead to rapid re­ver­sals”.

Here, how­ever, we must re­turn to the fun­da­men­tal ques­tion of the in­ter-re­la­tion­ship be­tween sav­ings, in­vest­ment and the cur­rent ac­count of the bal­ance of pay­ments.

The cru­cial point is that the dif­fer­ence be­tween gross na­tional sav­ings and gross fixed in­vest­ment is pre­cisely equal to the size of the sur­plus or deficit on the cur­rent ac­count. That’s math­e­mat­i­cal fact, not opin­ion.

Take 2006. Gross in­vest­ment (GCF) in SA was R350,7bn in cur­rent prices (S-104 of the March 2007 Bul­letin). Gross sav­ings were R239,6bn (S-124). That’s a sav­ings short­fall of R111,1bn. And the cur­rent ac­count deficit? It was… R111,1bn (S-78).

That brings us back to the cen­tral point: how SA can raise its ra­tio of GCF/GDP to 25% by 2014 from 18,6% in 2006. Such a rise will be pos­si­ble if, and only if, SA has ei­ther a much higher sav­ings rate than now or – ex­tremely haz­ardously and in prac­tice a non-starter – runs much larger cur­rent ac­count deficits.

The only an­swer, of course, lies in much greater sav­ings. But that will re­quire, among other fea­tures, Gov­ern­ment mak­ing ma­jor re­duc­tions in com­pany and per­sonal tax­a­tion, curb­ing State-spend­ing in­creases to fund that and to pro­vide far more in­cen­tives for in­di­vid­u­als to save.

LAG­GING AT THE BOT­TOM

Source: Pre­to­ria Univer­sity

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