Abstract
Saving is in essence a source of finance. According to the well known Keynesian
identities which found practical application in the framework of National Accounts,
saving and investment (capital formation) represent identical (ex post) macroeconomic
aggregates for the economy as a whole. Saving and capital formation within a
macroeconomic institutional sector will, however, only be identical in exceptional
circumstances. The corporate sector has since 1985 up to 2000 displayed excess
saving over capital formation. This phenomenon was prominent during the nineties.
The corporate sector is also responsible for the largest contribution to total saving and
total capital formation in the South African economy. The meaning of the excess saving
over capital formation is that there was no shortage of the supply of saving for financing
capital formation. Conversely, capital formation has not responded in the same manner
as to the availability of saving. Corporate saving expressed as a ratio to gross domestic
product has, despite an excess saving over capital formation, exhibited a downward
trend during the nineties. This has obviously impacted negatively on the total savings
rate of South Africa. Although the level of corporate saving has been smaller than
corporate capital formation in 2001 and 2002, both aggregates have improved during
2002 when expressed as a ratio of gross domestic product. Although various reasons
may be cited for the rather sluggish performance of saving and capital formation amidst
excess saving, this study is to provide a macroeconomic perspective on the cost of
capital and profitability explaining the under performance of saving and capital
formation.
Other than saving, debt financing represents one of the most important financing
elements for businesses. Particular suitable circumstances from a viewpoint of cost of
capital have developed during the nineties wherefrom saving as a financing element
could have flourished. A preference for saving to debt financing has developed.
Macroeconomically, businesses always finance with a combination of saving and debt
resulting in a weighted average cost of capital. Macroeconomic profitability and
macroeconomic cost of capital have to complement each other in order to channel any
finance, including saving, optimally to capital formation. A structural change pertaining
to profitability during the nineties has limited this condition. This has affected saving
and capital formation negatively during the second half of the nineties impacting on total
saving and capital formation. It is only during 2002 that the savings rate has shown
improvement from historical low levels. This has gone hand in hand with the cost of
capital and profitability being more complementary. An excess saving over capital
formation as such is no guarantee for an improved rate of capital formation. Requests
for more saving from the corporate sector amidst circumstances that were present
during the second half of the nineties in order to alleviate the low savings rate in South
Africa should be critically questioned. Circumstances in which saving and capital
formation may improve from historical low levels are from a financing point of view
heavily dependant on both the weighted average cost of capital and profitability which
have to maintain sustainable margins in the future.
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