by Rob Wilkie, CFO Softline and Sage AAMEA
I read a few interesting statistics in a MoneyWeb article posted in June ‘12.
- South Africa has a net saving to GDP ratio of 16.5% mostly thanks to savings by our large corporates. This implies that small businesses (like households) have saved negative amounts, borrowing more than they save and earn.
- In China the ratio is 50% and in India it is over 30%. With the exception of South Africa, the level of savings in BRICS countries is trending upwards.
Three primary reasons are commonly given for why saving levels in South Africa are so low.
- An emerging middle class previously without access to consumer goods and financial services are borrowing for consumption instead of saving in order to bridge the lifestyle gap.
- The state offers a small pension reducing the incentive to save for retirement. In China there is no state pension and the Chinese therefore have no choice but to save for retirement.
- Interest rates are at a 30 year low. Being lower than the inflation rate, the real return of putting your money in the bank is negative.
Savings are important when a business needs to accelerate growth; they are the most important and reliable source of investment to boost growth. The alternative to savings as a source of investment is borrowings; this source however is costly and less reliable.
In 2008 when the global financial crises hit, the SA government was forced to borrow in order to support the economic downturn through government spending and infrastructure investment. The result was a budget deficit (previously a healthy budget surplus) and accumulated debt on the country’s balance sheet (debt as a % of GDP increased from 25% to 40%). The implication has been a deterioration in our fiscal environment and outlook which in turn has precipitated a downward revision to SA’s credit rating and a threat to government borrowing costs. The country needs to invest more to boost growth, but ratings agencies have made it clear that they don’t want to see SA taking on further debt. It therefore has no choice now but to boost domestic savings as a source of investment.
The same applies to businesses who have borrowed excessively in order to boost their historic growth. In the existing climate banks are hesitant to lend further and many now face a cash crunch in a slowing economic cycle. It is precisely at this time that businesses need to invest in order to sustain and protect their earnings growth, however without a savings treasure chest or the capacity to borrow further they are forced into survival mode and will likely lose their competitive edge.