J Moleketi: Media launch of national savings month

29 June 2006

Ladies and gentlemen

It is indeed a privilege for me to address this gathering this morning. As
we all know the month of July is national savings month. Although this may not
signify a specific event in our past, savings are most certainly crucial to our
future.

The importance of savings for growth has often been mentioned in academic
literature. As with most things academic, there are arguments and
counterarguments. Some may argue that the empirical evidence is ambiguous as to
whether savings leads to growth or vice versa.

Arguments about causality aside however, what cannot be disputed is that
savings are an integral part of promoting growth and development, and that
without savings, wealth and capital investment are likely to be
compromised.

It is with these considerations in mind, that we must view South Africa’s
declining gross savings ratio with some concern. Though Government has done
well to reduce its dissaving, and corporate savings remain reasonable,
household saving has shown significant decline over the past two decades.

In aggregate terms, South Africa’s savings ratio peaked at 26,7% of Gross
Domestic Product (GDP) in the early 1980s. The latest estimates of gross
savings put the figure at 13% of GDP; which lags other emerging markets such as
China where the savings rate is in excess of 40% of GDP. Of part000000icular
concern is the low household saving rate which is at a record low of
approximately 0,2% of disposable income.

Of course, complexities underlie these simple statistics, but they do cast a
powerful picture. The level of household debt as a percentage of household
disposable income now stands at 68%. The access and usage of credit continues
to grow, despite warnings by the Reserve Bank Governor that households should
use the opportunity of a low interest rate environment to pay off debt.

It may be a natural consequence that household saving in South Africa would
fall since democracy, given that a large proportion of the population was
previously excluded in terms of access to credit, housing finance, job
opportunities have increasingly gained access to these. However, this is not
the entire picture, as the vast majority of the South African population still
struggles against absolute poverty.

This implies that disposable incomes and therefore those individuals’
ability to save are low. Yet even amongst low income households, mashonisas and
micro-lenders thrive. Surely, if one has the ability to repay a micro-loan,
then one also has the ability to save when not paying such a loan.

It is also encouraging to see that some banks have launched savings schemes
and products that take on board the collective savings of burial societies and
stokvels. The uptake in Mzansi accounts, which now stands at approximately 3,3
million, indicates that even though peoples’ incomes may be low, they are still
willing to save. Of course, the increase in Mzansi usage also shows that
consumer confidence in the banking sector is increasing, especially for those
previously unbanking.

I am also of the view that the investigation launched by the
Competition
Commission to look into the costs structure of banks will lead to some relief
to consumers. Initiatives to introduce further competition into the domestic
banking sector will, I am sure, inevitably lead to a reduction in bank fees. It
is this willingness to save that should be nurtured, and where a culture of
savings does not exist, it needs to be fostered. Naturally, people should save
for different reasons, including:

* To smooth consumption patterns over their lifetime.
* To provide for their retirement and old age.
* To finance expected, large expenditures, like the purchase of a house, or the
financing of their children’s education.
* To finance unexpected losses of income.

Unfortunately, often the importance of saving for some or all of these
motives only arises when the actual need arises. Adequate and prudent savings
however takes dedication and should be viewed as a medium or long term
activity.

From the point of view of Government, policy should assist in the
achievement of these objectives, given the broader social and economic
advantages to increasing savings. Initiatives such as the RSA retail bond are a
positive step by government to increase access to a cost efficient savings
vehicle which provides a decent return for the capital invested. At the moment,
the total investment in retail bonds is approximately R1,8 billion.

Initiatives such as these and recent developments in the retirement annuity
industry have begun to address some of the inefficiencies and opaque business
practices built up in the financial sector over decades of apartheid and
economic isolation.

The introduction by government of the retail bond saw interest rates on
medium and long term bank deposits increase almost immediately, as banks
realised they had to be more competitive in order to attract savers. With
regards to retirement annuities, poor disclosure and the high cost of products
has focused attention on the need to revamp the industry in order to restore
confidence to the long term contractual savings market.

The debate surrounding the reform of our retirement funding system also
places the issue of long term savings firmly in the spot-light. The need to
adequately provide for retirement is fundamental to the individual and from a
macroeconomic point of view, to the economy. In a move to spur retirement
savings, government announced in February’s budget a reduction in retirement
fund tax from 18% to 9%.

But it is not merely government and the financial sector industry which need
to recognise the importance of increasing domestic saving. Individuals
themselves need to take responsibility for planning their own future. This
means empowering oneself with financial knowledge and demanding explanations
from service and product providers where one is unsure or does not fully
understand.

Financial education and financial literacy at a basic level needs to begin
in schools. We have to start building and changing mindsets now, because making
consumer education truly effective will not occur overnight and is in fact a
multi generational project. It is in this space that South African Savings
Institute makes an important contribution to promoting a culture and an
awareness of the need to save.

The month of July should not merely be the month of savings, but the start
of a habit of savings for those who are not currently doing so. It should begin
with us, our family and our friends. Let savings be the diamonds on the soles
of our shoes. One way to lose our savings blues and certainly we have nothing
to lose.

I thank you.

Issued by: Department of Finance
29 June 2006