No saving grace
Government must provide meaningful incentives to companies and individuals
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.