[Source: http://today.moneyweb.co.za/article.php?id=760677&cid=2014-07-14#.U8PMUrmKDIU by Felicity Duncan.]
There are a few things we all know about South Africa. It has a lamentable savings rate. It has a household debt problem, as evidenced by rising non-performing loans at banks across the country. South Africans’ household income has been growing over the years. In addition, we know that inflation has been reasonably well contained for a number of years.
So, we have a conundrum. Prices have been rising, but so have household incomes. Yet, household savings rates have been very low, and household indebtedness has risen. What’s going on here? Why are South Africans taking on debt and not saving, even though their incomes are rising and inflation is relatively well-contained? Are South Africans just terrible money managers, or is there more to this story than meets the eye?
To solve this puzzle, let’s start by taking a look at the hard numbers.
The chart below shows quarterly data on inflation, income, and savings in South Africa. First, it shows quarter-on-quarter percentage changes in household disposable income (the darkest line; remember, disposable income is income after tax). As you can see, household disposable income grew strongly (and faster than inflation) from 2004 to about 2006, but then it started to sputter. Household incomes actually shrank in the earlier part of 2009, and then started to grow again, but weakly, and below inflation.
Next, the chart shows average inflation rate for each quarter since Q1 2004 (based on the monthly annualised rates published by Statistics South Africa). As you can see, inflation was modest from 2004 through 2006, then rose sharply to a peak in late 2008, at which point it began declining again. It has remained pretty steady since late 2011, hovering around the 6% ceiling. Since 2007, except for a brief period in 2010/11, it has been higher than income growth.
Finally, the flattish line at the bottom of the chart represents the ratio of quarterly household savings to household disposable income. As you can clearly see, the line is basically flat, although there is a clear improvement if you compare the data for 2014 with early 2008. In other words, South Africans save virtually nothing.
So, what does this chart convey? Well, since 2004, household income grew by a simple average of 4%, while prices rose by a simple average of 5.5%. In other words, income growth has not kept up with inflation. Even though inflation has mostly been within the target range, incomes are not keeping pace, which means that consumers’ budgets are under ever-more pressure.
The next chart shows the ratio of household debt to disposable income, and average quarterly inflation (note, there are two different scales used). As you can see, when inflation rises, household indebtedness increases, and as it falls, indebtedness falls. In other words, people appear to be borrowing money in response to rising prices, and when prices stabilise, paying off their debts as much as they can.
To me, these two charts very clearly illustrate the reality of life for most South African consumers. Their incomes are rising, but slowly, unpredictably, and less rapidly than consumer prices, as you would expect in a country with high levels of unemployment and relatively slow GDP growth. They are thus highly exposed to high inflation. When inflation speeds up, they find it hard to make ends meet, and must borrow to plug the holes in their budgets; when prices fall, they use the wiggle room they get to pay off their debt. In all of this, there is very little room for saving.
So, it seems that South Africans don’t save because they don’t have any spare money. But does this mean that they simply need to budget better, to free up cash for savings?
Personally, I don’t think so. In fact, it seems to me that South Africans face some fairly unique expenses that their peers in many other countries do not have, and that this is perhaps why our savings rate is so low compared to peer countries. Specifically, I think that many South Africans must pay for services that the government provides in other countries, so they end up paying double – they pay taxes, and then they privately pay for the services their taxes should cover.
For example, many South Africans pay for private security companies to protect their homes and families, because the local police are largely ineffective. Although things are improving, the SAPS remains incapable of policing the country and under-skilled when it comes to investigating crimes and prosecuting criminals. Thus, South Africans must take on the burden of paying for their safety, something that should already be covered by their taxes.
Middle-income South Africans also pay for private medical aid, and often pay for private schooling, or at least pay various fees to their local public school to try to compensate for the weaknesses of the country’s public education. Again, taxes should cover education and healthcare in a democratic society, but in South Africa, service delivery problems mean that many families pay for education and healthcare twice, once to Sars, and once from their disposable income. South Africans also spend a lot of money on cars and transit, because there are few good public transport options available.
In other words, I think that one major reason why South Africans save so much less than their peers is that they face a host of duplicate expenses. They pay their taxes, and then they pay private companies to provide them with services their taxes should finance. If the government wants to improve the national savings rate, it should consider improving service delivery, and enabling South Africans to stop paying twice for safety, education, healthcare, and transport. That would free up some cash for people to save, and ease the burden on consumers.
57 700 000 (mid 2018 estimate)
5.2% y/y in November 2018 (CPI) & +6.8 y/y in November 2018 (PPI)
2.2% q/q (3rd quarter of 2018)
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