HOW CREDIT DOWNGRADES ARE AFFECTING SAVINGS

ECONOMIST Mike Schussler, in a presentation at a Financial Planning Institute conference last week, said South Africa was not in as bad a position as other emergingmarket countries when faced with sovereign debt downgrades, largely because of our high level of savings in retirement funds, compared with countries such as Brazil and India.

He says South Africa, with about $320 billion in pension fund assets, has the eighth largest accumulation of pension fund assets in the world, in dollar terms. This is almost double that of Brazil, at about $175 million. South Africa is fifth in the world when pension fund assets are measured as a percentage of gross domestic product (about 98%). This is on par with the United Kingdom, ahead of the United States (59%) and far higher than Germany (7%).

Schussler says South Africa’s substantial pension fund assets mean that a large portion of government debt is held locally, by pension funds (see graph), which means a lower percentage is held by foreign investors than is the case in other emergingmarket economies. In many of these countries, well over half of their government debt is held by foreigners, he says. This high level of savings provides the country with a cushion in the event of a downgrade.

Schussler says South Africa is a highly liquid market, in currency, bonds and even equities. Our large savings pot, which includes money in collective investment schemes and insurance products, has funded industrial expansion into other parts of the world, to the extent that a large portion of the earnings from the JSE’s top 40 companies comes from overseas. When these companies repatriate earnings to shareholders, there’s an inflow in rands to counter the outflow when foreign investors disinvest. Brazil, for example, which doesn’t have many international companies, doesn’t have this extra buffer for its currency.

That is not to say, he says, that the downgrades will not affect the economy. The debt market will be more expensive, which will make life tougher for the consumer. “We are still very reliant on foreign capital in the local debt market, and will be for some time,” Schussler says.