saving, growth and the current account daan steenkamp ersa / sasi savings workshop august 2009
TRANSCRIPT
Agenda
• Link between saving, investment and the current account• Theoretical relationship between saving and growth• The case of a small open economy• Macro implications of low saving• Sustainability of the current account deficit• Implications for macro policy
Accounting identities
• In an open economy, domestic spending is the absorption of locally produced goods and services plus goods and services from overseas:
• Gross national product can also be expressed as the sum of expenditures by residents from national income
• Setting the above equal, the current account balance is the difference between domestic saving and investment (private and public):
• Current account balance is linked to net international capital flows:
• Re-arranging:
• Current account balance = Domestic investment - domestic saving • Foreign financing of domestic investment generate claims on domestic assets.
IBNCEMXGICGNP iv +++++= Pr -
TFRTSCGNP iv +++= Pr
)(+)(=++)(= GTISIBTRFNCEMXCA privpriv ----
NFATGIS privpriv Δ+)(+= -
CATGISNFA privpriv =)(+)(=Δ --
Saving & Growth Theory
• Exogenous growth models:– Saving supports higher investment and therefore a higher capital stock– Higher saving raises growth per worker only temporarily
• Endogenous growth models:- Higher saving raises per capita output and growth of per capita output
• Do savings alone drive growth? – Positive impact of saving has, however, been shown to be contingent on
complementary macroeconomic conditions and government policies that help channel savings into productive investment.
– E.g. financial sector development, macroeconomic stability, openness to trade, prudent fiscal policies, investment in education, microeconomic reforms that support efficient resource allocation.
• Can growth drive saving?– Life cycle models with liquidity constraints or endogenous models with habit
formation suggest that growth could impact saving.
Open economy setting
• If the economy is open and capital is mobile, foreign saving can be used to finance higher investment rate than domestic saving would allow.
• If the return on foreign capital after depreciation > cost of foreign borrowing- Foreign borrowing will raise the level of national income
• Availability of foreign capital can also lower domestic interest rates• Impact of inflows of foreign saving on domestic saving is ambiguous
- Lower interest rates reduce opportunity cost of current consumption, lower saving (substitution effect)
- Lower interest payments (borrowers) or income (lenders), can increase or decrease saving (income effect)
- Interest rate sensitivity of domestic saving an empirical question
6
High levels of domestic saving and investment are associated with high levels of economic growth
5
10
15
20
25
30
35
40
45
0
1
2
3
4
5
6
7
8
9
10GDP (RHS)Domestic Investment % GDPDomestic Savings %GDP
7
Saving shortfalls raises growth volatility
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
-4
-3
-2
-1
0
1
2
3
4GDP volatility
Balance on current account %GDP (RHS)
8
Impact of increased savings on the economy
• To increase domestic savings, domestic
consumption will have to decrease
• By substituting current consumption with
future consumption, investment can
increase, thereby increasing medium and
long run productivity
• The 5% level decrease in consumption
initially results in total saving increasing
by 20% which then allows investment to
increase by 15%
Decrease in level of consumption
-10-505
10152025303540
per
cent
ConsumptionTotal saving
Leads to investment increasing significantly
0
5
10
15
20
25
per
cent
Investment
9
Increased investment increases exports and GDP
Increase in competitiveness
0
0.5
1
1.5
2
2.5
3
Pe
r ce
nt
ExportsImports
• The increase in productivity promotes
exports, improving our
competitiveness, while imports are
driven by the increase in investment.
• It takes about 1 year for the impact of
increased savings and investment to
fully flow through to GDP
• The rebalancing of growth from
consumption to investment has a
lasting positive impact on GDP
Impact of increased savings on GDP
0
1
2
3
4
5
6
per
cen
t
GDPSaving as % of GDP
10
Inflows of foreign saving have helped raise domestic investment
10
15
20
25
30
35
40
45
Source: SARB
per c
ent o
f GDP
Gross saving GFCF
Domestic investment requires sustained foreign financing which is dependent on macroeconomic stability
Proportion of gross capital formation financed by foreign capital
-50
-40
-30
-20
-10
0
10
20
30
40
%
Source: SARB
Low domestic saving relative to investment manifests as a current account deficit
-10
-9
-8
-7
-6
-5
-4
-3
-2
-1
0
1
2
3
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Source: SARB
per
cent
of
GD
P
Saving-investment gap Current account balance
The current account deficit has been comfortably financed
-9
-6
-3
0
3
6
9
12
15
18
% o
f GDP
Unrecorded transactionsNet other investment flowsNet foreign direct investment flowsNet portfolio investment flowsTotal current account
*Quarter 1 annualisedSource: SARB
Capital inflows adding to stock of foreign liabilities
-200000
-150000
-100000
-50000
0
50000
100000
150000
200000
250000
300000
3500001
994
199
5
199
6
199
7
199
8
199
9
200
0
200
1
200
2
200
3
200
4
200
5
200
6
200
7
R m
illio
n
Net equity liabilities
Net FDI liabilities
Debt liabillities
Source: SARB
15
Relying on foreign savings implies growing claims on the income of domestic assets
-2
0
2
4
6
8
10
12
14
2002
2003
2004
2005
2006
2007
2008
per c
ent o
f GD
P
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
per c
ent o
f GD
P
Net capital flows as % of GDP
Dividend payments as % of GDP (RHS) -lagged two quarters
An increasing proportion of foreign liabilities are equity liabilities
0
10
20
30
40
50
60
70
80
90
100
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
%
Equity
Debt
Source: SARB
Foreign Portfolio Liabilities: Equity and Debt
17
Volatility is a greater problem if majority share of capital is short term capital
0
5
10
15
20
25
30
35
40
45
50
2000 2001 2002 2003 2004 2005 2006 2007
% to
tal i
nves
tmen
t
direct investment (long term capital)portfolio investment (short term capital)other investment
Cost of capital
Declining costs of domestic borrowing
-3
0
3
6
9
12
15
18
21
24
27
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
per c
ent
Nominal prime*
Real prime (CPI)**
Real prime (CPIX)***
Source: SARB, NT calculations* End of period** Metropolitan areas, 2000=100*** Metropolitan and other urban areas, 2000=100
Cost of capital
Declining costs of foreign borrowing (before crisis)
0
3
6
9
12
15
18
2000
2000
2001
2001
2002
2002
2003
2003
2004
2004
2005
2005
2006
2006
2007
2007
2008
2008
2009
per c
ent
0
100
200
300
400
500
600
700R157 yield
SA sovereign spread (EMBI) (RHS)
Sustainability of the current account
• In the short term, the availability of foreign capital will depend on maintaining investor confidence.
• This underscores the importance of sound macro management and political stability. • In the longer run, the efficiency with which saving is converted into investment is
particularly important for the sustainability of the current account deficit and ensuring we benefit from drawing on foreign saving.
• Servicing our foreign debt requires an increase in future exports or sufficiently high future real returns to domestic capital to service.
• Microeconomic reforms that address constraints to growth and enhance the economy’s international competitiveness and flexibility are crucial.
Conclusion
• By investing in resources, rather than consuming them, economies make a trade-off between present and future standards of living.
• Investment is funded through savings (both domestic and foreign).• Fixed investment allows for more sustainable economic growth and improves
international competitiveness.• In spite of low domestic saving, availability of foreign savings has supported higher
domestic investment in South Africa. • This has, however, seen the current account deficit widen and foreign liabilities rise. • Foreign saving must be used to expand our ability to export and save in future. • A higher rate of domestic saving would reduce our vulnerability to the vagaries of
investor sentiment. • It would help us develop a deeper and more liquid capital market, helping our
companies expand. • Higher saving would also give South Africans a greater stake in the gains from domestic
growth.