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.
