SA is depending more heavily on foreign capital to finance new fixed investment projects as the local savings rate falls, latest Reserve Bank figures show.
Foreign capital financed 15.5% of gross capital formation in the fourth quarter of last year, up from just 3.3% in the previous quarter, according to the Reserve Bank’s latest quarterly bulletin, which shows that SA’s national savings rate fell to 14% in 2023, down from 14.9% in 2022. For the fourth quarter, national savings were down to just 12.7%.
SA has historically had a poor savings rate, with government generally dissaving, households saving little and the only meaningful saving done by companies, who sit with cash on their balance sheets partly because they can’t find projects that yield a high enough return to offset the risk.
Stanlib economist Kevin Lings pointed out last year that SA’s savings rate was well below the 34% average for emerging markets, many of which have much higher rates of investment in the real economy.
The quarterly bulletin reported household savings fell to 1.7% in 2023, from 2% in 2022 while the corporate savings rate rose to 15.9%, from 14.1%. And with government spending significantly more than it earned in revenue the government dissavings rate rose to 3.6% for the year, from 1.3% in 2022.
The dearth of household savings reflects a consumer sector that is under pressure in a low growth, high inflation economy. Household debt rose faster than households’ disposable income last year, the bulletin reports, as did the cost of servicing that debt as the cumulative 125 basis point of rate hikes took their toll. Debt service costs increased to almost 9% of households’ disposable income in 2023, from 7.3% in 2022.
SA’s dependence on foreign capital has become ever more of a vulnerability over the past couple of years as the current (trade) account of the balance of payments has gone into deficit while foreign capital inflows have slowed, or even turned to outflows.
The bulletin shows a fourth quarter switch to outflows on the financial account of the balance of payments, on sharply negative portfolio flows. The financial account, which measures portfolio flows in and out of bonds and equities as well as foreign direct investment in or out of SA, recorded inflows of 1.3% of GDP for 2023 as a whole, up from 1% the previous year.
Move offshore
However, that would not have been enough to finance the deficit on the current account of the balance of payments, which rose to 1.6% for 2023, from 0.5% in 2022. A widening current account deficit and muted capital inflows would have been one factor putting pressure on the rand exchange rate last year.
The bulletin also shows trade in the rand continues to move offshore, with average daily turnover in the SA foreign exchange market decreasing 4.5% to $13.2bn in the fourth quarter, after a decline in the third quarter.
This is part of a longer-term trend in which daily forex market turnover in SA declined from more than $20bn five years ago as trade in the rand and other emerging market currencies such as that of Mexico and Turkey has increasingly shifted to the big global markets such as London and New York. A Bank for International Settlements survey last year found that nearly 83% of rand forex market turnover was conducted offshore in April 2022, with nearly half of this occurring in the UK.
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