HOW CREDIT DOWN­GRADES ARE AF­FECT­ING SAV­INGS

Weekend Argus (Saturday Edition) - - FRONT PAGE -

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.

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