Macroeconomic policy and saving Johan van den Heever South African Reserve Bank South African Savings Institute/ERSA Workshop August 2009

Outline General observations on saving Fiscal policy and saving Monetary policy and saving Conclusion

General observations on saving

The savings rate has displayed considerable fluctuations over the past six decades Recovery to reasonably high levels Considerably weaker levels Ultra-low saving immediately after war 4

South Africa: Saving and investment ratios Domestic saving and investment trends have diverged since 2005 South Africa: Saving and investment ratios Source: SA Reserve Bank

Various forces dominate the savings ratios of the different institutional sectors 6

Overall savings rate and real gold price Overall and corporate saving have been influenced to a significant extent by the prices of exported commodities Overall savings rate and real gold price 7

Fiscal policy and saving

3-year framework, sustainability emphasis Government finances recovered neatly after deterioration in the 1980s and early 1990s Favourable export prices Weak growth, sanctions International crisis and response 3-year framework, sustainability emphasis Strong growth 9

Government loan debt has been managed prudently during the past decade, creating fiscal space to handle economic setbacks 10

Monetary policy and saving

SA savings rate and interest rate There is a limited sensitivity of aggregate saving (and consumption) to interest rates SA savings rate and interest rate 12

Household savings rate and interest rate Household saving also displays limited sensitivity to interest rates Household savings rate and interest rate 13

Ratio of debt to disposable income of households Determinants of household savings: Access to credit seems to be important… Ratio of debt to disposable income of households Not really much deleveraging yet by SA households Painful interest rates Credit ceilings abolished Painful interest rates Financial innovation, liberalisation 14

Household sector: Net wealth and savings ratios ...and rising debt is often the counterpart to declining savings. Household sector: Net wealth and savings ratios 15

Household sector: Net wealth and savings ratios Determinants of household savings: Wealth effects also seem to be important. Household sector: Net wealth and savings ratios 16

Determinants of household savings: Habit formation and institutional factors are important. 17

Habit formation etc makes for downward stickiness of consumption

Sticky, but consumption (and saving) DO respond to monetary policy 19

USA: Household savings rate …and to confidence and wealth variables USA: Household savings rate Source: US Department of Commerce (Bureau of Economic Analysis)

This downward stickiness also extends to government consumption A government bureau is the closest thing to eternal life we’ll ever see on this earth - Ronald Reagan

Interest rates and savings behaviour Institutional and structural factors play an important role in the determination of saving The impact of short-term interest rate movements on saving may be blunted or perverse: Target savers: As interest rates rise, less saving per period is needed to achieve a given eventual target amount Interest rate increases may dampen economic activity and income in the short run, and with lower income it is difficult to save more Higher short-term interest rates may lower long-term inflation expectations and long-term interest rates, introducing more ambiguity into the situation Excessive reliance on short-term monetary policy measures to control savings seems to be inappropriate, given the importance of structural factors and likelihood of perverse reactions to such measures

Extending the array of policy instruments Cash flow and affordability matter considerably in determining expenditure and savings decisions A government loan levy temporarily drains cash from taxpayers, much like income tax – until it is repaid Regulations to set or change minimum deposit ratios and maximum repayment periods in financing transactions can influence affordability and with it the use of credit and extent of expenditure Changing cash reserve requirements can influence banks’ ability to lend over the short term All of these measures may have the desired impact in the very short run, but tend to be ineffective in the longer run Once introduced or set at a certain level, “getting off the tiger” may also be very difficult

So, what should monetary policy do? An environment of price and financial stability is probably the best contribution that monetary policy can make towards saving, investment and the health of the economy in general Overambitious monetary policy should best be avoided “Inflation nutters”: forceful use of monetary policy to immediately and fully neutralise any price shocks or deviations Attempting to do too many things – simultaneously trying to forcefully steer inflation, employment, asset prices, the exchange rate, saving… Standing in for savings deficiencies or resources constraints by printing money

Exclusions Areas not touched on include the exchange rate and saving exchange control and saving viewing expenditure on education as capital formation the impact of government fixed investment on future government consumption needs, to name but a few obvious ones

Conclusion Monetary policy should counter inflation with some flexibility and patience but nevertheless with determination and resolve mindful of financial stability considerations Sound savings decisions, like all resource allocation decisions, are best taken in an environment of stable prices and financial stability Fiscal policy should generally continue to be focused on the medium to longer term With some flexibility if there is a “clear signal” (as with the current global crisis)… … but always returning to sustainability of key parameters Due to ratchet effects, large policy swings (both fiscal and monetary) have the potential to undermine savings for an extended period

Thank you!