Hidden handbrake on South African economy

South Africa’s savings rate hit its lowest share of GDP in the first quarter of 2024, significantly limiting the ability of government and companies to finance new investments that would boost economic growth. 

Furthermore, this savings rate is expected to decline after implementing the new two-pot retirement system, with billions flooding out of savings. 

South Africa has long had a savings problem, with its rate being among the worst in the world and significantly hindering its economic growth. 

Despite an uptick during periods of high growth in the mid-2000s, South Africa’s household savings rate has consistently been below 5% of GDP. 

This has progressively worsened over the past few years, with household savings being negative for the last six quarters. 

In the first quarter of 2024, the household savings rate as a share of disposable income was -0.9%. This means South Africans are spending more than they make and taking on debt to make the difference. 

Not only is this damaging to their personal finances, but it significantly impacts economic growth by limiting the local funding base for major investment projects. 

As Stanlib’s senior economist Ndivhuho Netshitenzhe explained, any reduction in savings decreases the pool of funds available for investments. 

This particularly affects the private sector, which relies heavily on debt-based funding for its projects. 

While big corporations and the government can tap international investors for funds, smaller companies must turn to banks for loans to fund their growth. 

Netshitenzhe said that South Africa’s savings rate has declined to the point where even the government and big corporates will struggle to tap investors for funds. 

South Africa’s poor savings rate compared to its faster-growing emerging market peers is shown in the graph below, courtesy of Stanlib. 

Netshitenzhe said implementing the two-pot retirement system will worsen the situation.

Allowing withdrawals from long-term investment and savings funds will further decrease the country’s savings rate and shrink the pool of capital available to private companies. 

“While some surveys suggest that up to 50% of the money withdrawn will go to paying down debt, we argue that a large portion will simply be used for general consumption,” she said.

Consumers, especially middle-income earners, who are the most likely to withdraw from their savings pot, have recently faced headwinds that left them short of discretionary income.

Thus, there is an element of pent-up demand for discretionary items like clothing and appliances.

Increased consumer spending will have a short-term economic benefit, and some companies stand to benefit immensely from this. 

It will also ease the government’s financial burden by increasing tax revenue and GDP, making its debt-to-GDP ratio appear better on paper. 

However, these benefits are only short-term, with longer-term economic growth being determined by underlying fundamentals such as saving and investment. 

“While the two-pot system aims to offer fund members the flexibility to access their retirement funds in times of distress, it is essentially turning long-term savings into short-term consumption in a country that has very little savings to start with,” Netshitenzhe said.

She hopes that, over time, the magnitude of annual withdrawals will decline to a steady state below current outflows. 

“Unfortunately, international experience shows that if these types of reforms are not well designed and implemented, the boost to economic activity tends to be short-lived and results in a decline in pension savings over the long term,” she said.  

“All this occurs without alleviating the financial pressure on consumers by reducing their debt or enabling them to build a buffer against higher costs.”