The hottest question in the investment industry right now is “where is the rand going to go?” The answer, of course, is not simple.
There are numerous factors influencing the currency at present, not least the attempts by many countries to weaken their currencies in order to export their way out of recession. With much of the developed world having opted for this path, their currencies, and notably the dollar, have seen value erosion.
Some emerging economies with strong currencies have also hopped onto the bandwagon: they are buying dollars at pace. South Africa, by contrast, has opted not to follow this trajectory. Buying dollars is an expensive route to take, given that the interest earned on dollars is extremely low, particularly relative to our own interest rates. Finance Minister Pravin Gordhan has made some concession, though, as part of this year’s balance of payments surplus will be used to purchase additional reserves.
A further measure that some emerging markets have put in place is that of a Tobin tax – a tax on foreign capital inflows – in an attempt to discourage the inflows. South Africa is not really in a position to discourage inflows on the financial account of the balance of payments as we have to finance the current account deficit and, for now, Gordhan has poured cold water on this suggestion.
If all countries are simultaneously attempting to weaken their currency, it becomes a race to the bottom. Currency wars could lead to trade wars and in the end, no-one benefits.
It is even debatable as to whether South Africa should target a weaker rand. If we want to develop our infrastructure cheaply, we really want a strong rand to keep the cost of imported machinery and equipment down. Expanding our infrastructure is critical to ease the existing economic bottlenecks and create productive capacity for future growth.
The impact of insufficient power-generating ability is well known by most South Africans. We have a similar lack of capacity in water provision, transport networks, harbours and other infrastructure. It is essential to resolve these shortages in order to prepare the economy for future growth.
Long term currency movements tend to be driven by the underlying inflation rate differentials. Even though South Africa’s inflation is in low territory and seemingly contained at present, we believe that this is unsustainable. Inflationary pressures are mounting from considerably higher labour costs, increased utility costs (notably electricity and water), and higher fuel costs (which filters through to most goods), as well as structural inefficiencies.
Transport accounts for 18.8% of the consumer price index. Transport inflation is currently a mere 1.1% and this is unsustainable, given the anticipated rising oil price combined with the galloping demand for oil emanating from China.
The rand is at the mercy of strong foreign flows and it is therefore difficult, if not impossible, to predict short term movements in the currency. It is however, reasonable to assume that, in the long term, the trend will be weak relative to our major trading currencies.
I don’t believe that anyone can consistently predict near term moves in the rand, but there is a long term desire on the part of most elements of the South African economy to weaken the rand.
Are you part of or in the Sandwich Generation?
On Tuesday Old Mutual presented the latest findings of their Biannual Old Mutual Savings Monitor. This survey covers the savings habits of working metro households in South Africa and savings for its purposes include all savings products, policies and extra amounts paid into debt (example if a bond is R1000 and R1500 is paid R500 is classed as savings for the purposes of this survey.)
The survey found that there is a slight improvement in our savings habits in the past year – more of us are saving, particularly among the higher income earners where there is more disposable income. There has also been an improvement in our attitudes with more people feeling confident and less people saying they couldn’t make ends meet without credit.
The survey has a vast amount of information available and today we want to highlight three areas – the Sandwich Generation, what makes a good saver and the use of disposable income.
We’re spending a little less on living expenses
The Old Mutual Savings Monitor looked at savings in various income groups (keep in mind that the survey is of working metro households ).
For the lower income groups earning R6 000 or less their consumption percentages have shown some changes in the last year.
In 2009, this group spent 70% of its income on living expenses and a year later this had dropped to 65%. Debt servicing has remained the same but savings have increased from 15% in 2009 to 19% in 2010.
For those earning R6 000 to R13 999, in 2009 64% of income was spent on living expenses and that is down to 58% a year later. Their savings have increased from 15% to 19% in a year. Debt servicing has moved up one percentage point from 14% to 15%.
In the R14 000 – R19 999 earning group living expenses are down as a percentage of income from 57% to 56% and savings are up from 15% to 19%.
The upper income group of R20 000 – R39 999 used 56% of their income on living expenses in 2009 and 50% in 2010, savings increased from 15% to 21%.
The figures are similar for the really high earners – R40 000+ and they spent 50% of income on living expenses this year down from 55% in 2009. Their savings have increased in a year from 16% to 21%.
Debt is a major beneficiary of this saving as are formal savings products.
And the top income group also shows a trend to less cash – there is a decrease in banked cash savings for this group and an increase in retirement annuities, life assurance, shares and endowments.
Does this extra saving lessen our future burden? Unfortunately not – whether we like it or plan for it or acknowledge it – 58% of those surveyed said they either were planning to support their parents or family members or would end up having to do so.
The Sandwich Generation
If you are working and supporting a parent and child and yourself you are in the Sandwich Generation. This term was coined in 1981. Old Mutual have launched the OMSA Sandwich Generation Indicator that will monitor this statistic.
Speaking at the event on Tuesday, Old Mutual head of research Lynette Nicholson said that 23% of South Africa’s working population fall into the Sandwich Generation.
China has a Sandwich Generation of 37% of the working population, USA and Canada 13 – 15%, UK 10%, Australia 6% and Japan 6%.
It has significant impacts on savings – with less money available for formal and informal savings products. Nicholson said that the Savings Monitor showed that while the Sandwich Generation know it is important to save – they are financially stressed and make more use of credit. In addition they are more risk averse, Nicholson said.
The highest proportion of Sandwich Generation adults are Generation X – born between 1965 and 1979.
Sandwich Generation’ers have to deal with parents and children and in South Africa 69% of 18 – 24 year olds are still living at home and 45% of 25 – 34 year olds are living at home. (The Boomerang Generation are those who have previously left home but then return to living at home).
It can get more stressful for the Club Sandwich Generation – these have an extra layer in the form of grandparents or grandchildren to support.
What makes a good saver?
Spare disposable income is a good start. But having that won’t necessarily make a good saver – income levels do not define savings. Having debt is also not a sign of a bad saver.
Nicholson says that analysis based on attitudes and savings behaviour can put savers on a procrastinator to organiser continuum.
The Procrastinators save little, are stressed and worried, materialistic, and disorganised. Organisers save a lot, are happy and content, cautious and controlling, very organised and take responsibility. (Note that this is a continuum and that at the end of a stressful year it is probably entirely acceptable to not be entirely exhibiting organised behaviour even if your financial affairs are in order)
Procrastinators spend 64% of income on living expenses and save 17%, Organisers spend 54% living and save 23%. Organisers tend to use more savings products and place more emphasis on saving for retirement than paying off debt.
But they have debt.
Any bond 20% 13%
Car finance 17% 13%
Credit Card 44% 25%
Store Cards 60% 63%
Personal loans 25% 34%
What makes an organiser? They plan ahead, they recognise the need to reduce debt, they favour saving, and they use financial advice. Organisers trust experts and their primary source of information is a financial adviser. Procrastinators tend to use mass media as their main source of information, followed closely by word of mouth.
The key message Old Mutual highlights – we each need to confront our own financial reality, and plan appropriately. A well diversified savings portfolio is optimal.
The opinion and comment in this newsletter is opinion and comment only and does not in any way constitute financial advice. Please consult a professional financial planner for all financial decisions.