Determinants of household savings in South Africa: an econometric approach

Savings play a crucial role in promoting economic growth through their effect on investments. In addition, savings cushion the economy against fluctuating international capital flows. In periods of low or fluctuating capital, domestic savings are essential to finance high levels of capital formation thereby leading to increased productivity and sustainable economic growth. In South Africa saving levels have been declining, particularly household savings. This has been a major cause of concern as low savings hinder economic growth. In light of this, the study explored the determinants of household savings in South Africa over the period 1990 to 2011 using quarterly data. Based on the review of the theoretical and empirical literature, particular attention was paid to the effects of age dependency ratio, the level of household income, inflation and real interest rate on household savings. Apart from informal graphical test, the study employed the Augmented Dickey-Fuller and Phillips Perron unit root tests to test for stationarity in the time series. To identify the long-run and short-run dynamics among the variables, the study used the Johansen co-integration and the Error Correction Mechanism. Results of the study indicated that age dependency ratio, inflation and real interest rate have a positive impact on household savings whilst income has a negative long run relationship with household savings. In addition, the findings revealed that income, inflation and real interest rate play a major role in determining household savings whereas age dependency ratio is insignificant. The study recommends that the government should employ a countercyclical fiscal policy to avoid the development of excessive current account deficits during periods of more rapid economic growth, rising investment and falling saving